The fast-changing gas game now Ukraine is in play

THE Yanks are coming, and they have Australia’s Asian gas customers in their sights, but Slugcatcher is not convinced that the deals likely to be offered by US gas exporters will be the bargain that some people seem to expect – or that huge volumes of gas will be available.
The fast-changing gas game now Ukraine is in play The fast-changing gas game now Ukraine is in play The fast-changing gas game now Ukraine is in play The fast-changing gas game now Ukraine is in play The fast-changing gas game now Ukraine is in play

ENB's infamous Slugcatcher

Lou Caruana

Events last week produced a mix of possibilities as far as Australia’s LNG sector is concerned, and not all of them were negative.

The most aggressive, if not disturbing comments about US LNG flooding Australia’s backyard markets in Asia came from a former associate deputy secretary of the US Energy Department.

In a talk delivered to the Australian Domestic Gas conference Randa Fahmy Hudome warned that Australia’s gas industry was too relaxed about the threat posed by US gas exports.

To make her point Fahmy Hudome, who these days runs a government-relations consulting business, twisted an Australian slang saying from “no worries, mate” into a warning: “be worried, mate”

Her background in US politics and global energy policy indicates that Fahmy Hudome ought to know what she is talking about.

Fahmy Hudome’s message touched a few nerves in the Australian energy sector because everyone in the industry knows Australia grew fat and lazy during the resources boom that created explosions of domestic construction and operating costs.

If a score was being kept that would be Fahmy Hudome 1, Australia’s LNG industry 0.

Interestingly, though, she was not having it all her own way. Other things happened last week which evened up the score, and might even have restored fat and lazy Australia to its leadership position.

First came a warning blast for Asian energy buyers who had been factoring into their spreadsheets the super-low gas prices available last year at the Henry Hub gas centre in Oklahoma. They have just discovered domestic US gas prices can rise as fast as they can fall.

Rather than being able to plug into gas at $US2 per million British thermal units the Asian buyers discovered the starting price during a cold winter is 200% higher at $US6/MMBtu. Add on refrigeration, processing and transport costs and the landed price in Tokyo or Shanghai might not be that much cheaper than Australian LNG.

The price of gas is one issue that has moved against Asian buyers hoping to jump aboard the US gas express powered by that country’s shale-gas revolution.

Now comes an even more important point – will the US actually allow much gas to be exported.

That is a question that has been floating in the background for some time with people such as Fahmy Hudome confident the spirit of free enterprise and free trade for which the US is famous would not permit road blocks to be erected in front of LNG exports.

However, as the world discovered over the past few days there is trouble in Ukraine and that is trouble with a capital T.

Russia has effectively invaded its southern neighbour and one-time province.

The U.S. has warned of consequences, and Europe is crawling into a hole hoping the big boys of geopolitics will not turn name-calling into war.

How the Ukraine mess works out is anybody’s guess but Slugcatcher’s view is that whatever happens, it will force up the price of oil (and gas) because that will be in the best interests of Russia, which needs the revenue to (a) pay for its now forgotten $US50 billion Sochi Olympics party and (b) pay for the army it is moving into Ukraine.

Rising oil prices will ring alarm bells around the world, and loudest in Washington, which was just becoming comfortable with the idea of a future free from oil imports.

Can you see where The Slug is heading?

Russia v Ukraine is a private mess in a nasty part of the world, but it is Russia’s mess and it will evolve along the lines of “if you break a country, then you own it, and have to pay to put it back together”

How will Moscow pay for Ukraine, a country it believes is close to the Russian soul, and should never have been set free in 1994? Oil revenue, because that is all Russia really has.

Meanwhile, back in Washington the questions will have started with the first being that perhaps it is not such a good time to be exporting gas to Asia when we might need all we’ve got at home.

Tricky, isn’t it, but it is also very important food for thought and while it is too early to wave Australia’s favourite card (the one called Lucky Country) there is a certain waft of good luck flowing out of the mess in Ukraine towards Australia’s LNG industry.