Tag Archive for: LNG

The gas plan that’s sailing Australia into strategic peril

Australia’s east coast is facing a gas crisis, as the country exports most of the gas it produces. Although it’s a major producer, Australia faces a risk of domestic liquefied natural gas (LNG) supply shortfalls as soon as 2028.

Domestic price caps, intended to keep residential energy costs down, makes exporting gas more profitable. So importing gas, and therefore building LNG import terminals, appears to be the policy of choice for the Victorian government. However, relying on imported LNG will create a vulnerability in energy security.

Instead, Australia should be developing resilience. We should prioritise new domestic projects, such as the Northern Territory’s Beetaloo Basin, to increase domestic supply and improve our energy resilience. Distribution infrastructure would be needed.

Import terminal projects, such as the recently constructed Squadron Energy’s Port Kembla terminal, and Viva Energy’s Geelong proposal, are pitched as fast, efficient, market-driven solutions. The essential logic: if we export too much, we can simply buy it back on the global market.

It’s a traditional market solution that does not account for strategic risk and the potentially higher prices of imported gas. While commercially convenient, it assumes ongoing access to the international market.

Importing LNG ignores lessons we should be learning from Australia’s liquid fuel supply chain failures. Australia imports around 90 percent of its refined fuels. Nearly all local refineries have shut. We rely on complex, just-in-time maritime supply chains for the fuel that powers our economy and sustains our military.

The Department of Defence and national security experts have long warned that international maritime supply chains are vulnerable to disruptions—whether due to conflict, coercion or climate. Defence continues to scramble to patch our vulnerability with stockpiles and contingency planning.

Yet our gas policy seems intent on replicating these vulnerabilities. We are creating dependency on overseas production and on maritime transport. LNG tankers, and the floating storage regasification units that they feed, rely on uninterrupted access to global trade routes. The same routes that are subject to increasing contestation.

Gas is a strategic resource as well as a commercial product, with applications across commercial, industrial and residential sectors. It is particularly important for Australia’s mining and manufacturing sector. In the event of major conflict in the Indo-Pacific, Australia’s maritime trade will be directly threatened. It will need to defend itself and keep the economy running, and likely increase domestic manufacturing capacity as well. Gas will be an important part of this.

The government is committed to gas as a long-term source of energy, and there is currently no viable clean alternative to replace its industrial applications. We need similar commitment to expanding overall gas supply and production.

The federal resources minister, as a last resort amid shortfall, can redirect LNG exports back into Australia. But such an interventionalist practice would likely harm foreign investor confidence and damage important bilateral relationships.

Tapping available domestic resources is a better option. Australia has ample gas reserves in the Northern Territory, notably the Beetaloo Basin. But we lack the infrastructure to transport that gas where it is needed. A new pipeline connecting the basin to the east coast would be a nation-building project. It would also build resilience by creating domestic supply for a strategic resource.

Such projects will face such challenges as timeframes, costs and environmental risks. Each must be considered and carefully investigated. But failing to secure resilient domestic energy supply has its own costs and risks. Dependency on imported gas makes us vulnerable to global markets, international maritime transport and foreign actors. All while we have large domestic reserves.

Importing LNG will unnecessarily outsource control over a crucial economic input. Building overland pipeline infrastructure to access domestic reserves will develop self-reliance and retain Australian ownership over a strategic resource.

The Australian Competition and Consumer Commission has warned that while imports may be a viable short-term option with lower up-front infrastructure costs, they alone will not guarantee price stability or energy security. The Defence Strategic Review has called for whole-of-nation approaches to resilience. Gas is a test case.

We need to consider strategic risk in our energy planning. Short-term price signals cannot outweigh long-term sovereign capabilities and strategic interest. Nor can national security and energy policy remain separate.

We must act right now, as energy policy is at the fore of national political debate. We should fast-track the development of reserves such as the Beetaloo Basin and prioritise projects that underpin energy resilience and future prosperity. We should treat gas like the strategic asset it is and commit to pipeline infrastructure that connects our nation, not just our markets.

Who will buy Russia’s gas?

Russia’s attempts to diversify its gas export markets have been in the news of late, and, despite the ambiguities, the prospects for and implications of these moves raise some important geopolitical issues.

China has increased its purchases of Russian gas, while Europe is attempting to mitigate its dependence. But—leaving Europe’s energy travails aside—what are the volumes of gas involved? Can China provide an alternative market for Russia, and how useful is Russia as a source of gas for China? There’s reason to be sceptical, at least in the immediate future.

As analysis by the Yale School of Management recently observed, the Siberia–China connection, the Power of Siberia 1 pipeline, isn’t yet operating at full capacity. A lack of pipeline interconnections means that piped natural gas isn’t immediately fungible between markets. There remain disagreements over price, too. China has long desired lower prices than those paid by Russia’s Western European customers—though, as a Forbes report observes, data backing analysis of relevant pricing agreements is lacking.

Despite an attempted pivot over the course of 2022, the bulk of Russian gas can’t simply be redirected to China at the same scale in the near term. China purchased just 16.5 billion cubic metres (bcm) from Russia in 2021, while Europe inhaled 170 bcm that same year. Assessing how big the shift has been is very difficult, because China ceased publishing pipeline gas import data this year.

China is a solidly diversified gas importer, and it’s unlikely that China’s leadership is keen on increasing the country’s dependence on any one partner in this crucial sector. It imports large amounts of liquefied natural gas, including from the United States and Australia. Australia was China’s most significant gas import source in 2020–21, providing 30.7 million tonnes of LNG (on a rough conversion, 42.3 bcm). China has natural gas pipeline connections into Central Asia, the most  important of which brings piped gas from Turkmenistan. China’s gas demand in 2021 was 367 bcm; even a significant rise from Russia’s Chinese export base of 16.5 bcm in 2021 would be but a small fraction of total Chinese demand.

The authors of the Yale study conclude that, ‘when taken in totality, the outlook for Russia in lining up replacement buyers for its… natural gas production beyond this coming winter seems highly unfavourable’. Energy policy expert Nikos Tsafos came to a similar conclusion: ‘Russia will never have market power in Asia, certainly not compared to its dominant position in the European market. The gas pivot from Europe to Asia will work, but it is not a one-to-one shift by any means.’

These prospects lie in the long term and require the realisation of massive infrastructure projects (‘Power of Siberia 2’ and potentially others), the capital expenditure for which Russian firms are set to have to foot, as well as import market appetite.

Mongolian Prime Minister Luvsannamsrai reportedly said in July that construction of the Power of Siberia 2 pipeline connecting the two countries via his country would begin in 2024. This is an important update to old news; the original agreement for the pipeline was signed in 2019. The reporting suggests that while the aim is for the pipeline to be operational in 2030, ‘industry executives believe that could be brought forward given Moscow’s need to find markets for its energy supplies’.

If and when the pipeline is completed, its 50 bcm annual capacity will increase the scope for Russian–Chinese energy trade. If Western Europe can break its import dependence in the meantime, and do so more quickly than many believe is feasible, this will surely be welcomed by many. At the same time, a Russian gas sector with secure exports to China means this income source will be much more insulated from Western influence.

The pipeline is likely to be a plank of the growing, broader strategic partnership between China and Russia. Given China’s historical concerns about its ‘Malacca dilemma’—that its import dependence on fossil fuels, especially oil, makes it vulnerable in the US Navy–dominated global maritime commons—this should be expected to form a very significant part of that partnership.

But as has been pointed out in general, this development is unlikely to change the unequal nature of the China–Russia partnership. As things stand now, Russia needs the Chinese export market more than China needs Russia as a supplier.

The other obvious means for China to solve its Malacca dilemma is via renewable sources that might largely obviate its dependence on offshore commodity supplies. Like that for Western economies and militaries, any such opportunity is going to take years to achieve, though the transition is already occurring on massive scale in China.

Nonetheless, one analysis suggests that China’s gas demand will continue to grow until 2030, and then plateau until 2050. Any hastening of China’s domestic transition to renewable sources would be a welcome acceleration of the collective trajectory towards net-zero emissions but augur poorly for gas exporters.

Yet it’s impossible to discuss Russian prospects over the decades to 2050 without reference to the weakening of some of its import appetite. Russia remains a ‘petrostate’ and climate denial has been built into the Kremlin’s public posture. Oil and gas constitute a huge portion of Russian exports as well as of Russian government revenue.

The price-spike-driven increase in these export revenues has received much attention since Russia’s invasion of Ukraine began. One recent analysis suggests that Russian export volumes continued to decline in June and July, and that reductions have cost Russia more than €200 million a day since the invasion, but that high gas prices tied to the same crisis have mitigated this impact.

The prospect of the dysfunctional Russian state and economy executing a smooth transition away from dependence on fossil-fuel exports is shaky. In the long term, dependence is an unambiguous economic liability for Russia. What constitutes the long term hinges on the pace of the global transition away from fossil fuels.

From an Australian point of view, while any short-term efforts are likely to be of marginal consequence, long-term Russian gas-diversification measures are likely to affect Australian LNG export markets. How these impacts are priced into markets are for financial analysts to comment on. The Power of Siberia 2 pipeline might prove a significant contribution to China’s ability to change the balance of its import sources of gas, and thus free it to import less from Australian suppliers. This is particularly the case if piped gas remains cost-competitive compared to Australian LNG, as is likely.

So, as always, the picture is complicated. Russia can diversify, but not as quickly as it would prefer and not without uncertainty about long-term volumes. Russian–Chinese pipeline gas is ultimately likely to improve China’s import options and allow it greater choice on LNG import volumes, with demand growth out to mid-century likely to level off but not reverse. Over the truly long run, the pace of the transition to renewables in China as well as globally is a key factor underwriting global gas demand.

Australia could lose out from geopolitical machinations over global gas supplies

In August last year, Olaf Scholz—then Germany’s finance minister and now its chancellor—attempted to persuade the Trump administration to drop its proposed sanctions on the companies building the Nord Stream 2 gas pipeline from Russia to Germany beneath the Baltic Sea.

Betting on the transactional nature of Donald Trump’s regime, Scholz wrote to Treasury Secretary Steven Mnuchin promising that Germany would spend €1 billion on facilities for importing liquefied natural gas from the US if the construction of the pipeline were able to proceed unhindered.

Because it was transactional, the Trump administration calculated that Germany would be more likely to boost its LNG purchases from the US if sanctions were enforced. The mere threat of them halted the pipeline’s construction.

It took the Biden administration to withdraw the shadow of sanctions, allowing the pipeline to be completed with an understanding that Germany wouldn’t allow Russia to use its gas supplies to Europe as a weapon against Ukraine.

The detail of that understanding wasn’t disclosed, but with the US warning that Russia could be planning a major attack on Ukraine, the security of gas supplies to Germany and the rest of Western Europe hangs in the balance.

It’s assumed that Germany has promised the US that it won’t import gas through the new pipeline if Russia takes military action against Ukraine or turns off gas supplies through the trans-Ukrainian pipeline.

Russia supplies around half the European Union’s gas imports and couldn’t readily be replaced by other suppliers, such as pipelines from Norway, or by LNG.

Demand for gas is partly being driven by the phasing out of coal-fired power stations. As a fossil fuel, gas is being targeted for phase-out by climate activists as well as coal, but policymakers see it as a transition fuel because of its lower carbon emissions and its responsiveness at times when renewable power sources aren’t operating.

The expectation is that as electricity-storage technology develops, the need for gas will diminish, but in the meantime, gas supplies are critical to power generation, industry and domestic and commercial heating.

Europe has seen Russia use its control over gas supplies for geopolitical ends before. Russia turned off the taps in the thick of winter in January 2009, halting all gas supplies through pipelines that passed through Ukraine to Western Europe, ostensibly in a dispute over transit fees.

The Nord Stream 2 pipeline, built at a cost of around US$11 billion and designed to carry around 55 billion cubic metres of gas a year (equivalent to around half Australia’s LNG exports), would reduce the strategic importance of Ukraine to Europe while increasing Europe’s direct dependence on Russia.

The pipeline has been completed but is not yet operational because regulatory approvals haven’t been granted. Russia has cut back its supplies to Europe through Ukraine, with speculation that it’s engineering a price spike to force regulators’ hands.

It has been almost 50 years since the OPEC nations pushed the security of energy supplies to the forefront of global geopolitics. Then it was oil; today, it’s gas.

Russia is using its vast reserves to leverage its return to superpower status. The US sees its own gas reserves from fracking as an alternative to Russian supplies.

There are other important players in global gas markets. Australia is the largest exporter of LNG, with output now marginally higher than the long-time dominant supplier, Qatar. Taken together, however, Russia’s supplies of pipeline gas and LNG are more than double the size of Australia’s shipments.

The US is the most potent counter to Russia because its exports are growing so rapidly. International Energy Agency data shows US gas exports rising from less than 20 billion cubic metres in 2017 to 85 billion cubic metres this year and a forecast 125 billion cubic metres by 2025. It will overtake both Australia and Qatar, which both export of a little over 100 billion cubic metres.

Russia’s LNG exports are also growing rapidly, but 85% of its exports are through pipelines. Gas is generally cheaper through pipelines. Pipelines lock customers and suppliers together, with neither able to switch readily.

The US has been vocal in its opposition to the Nord Stream 2 pipeline since the Obama administration, but its principled support for Ukrainian economic independence has always been backed by self-interest. As a rapidly growing exporter, the US is keen to gain market share from whomever it can and it has always seen Europe’s need for imported gas as a valuable prize.

While seeking to increase Western Europe’s dependence on its gas, Russia has also been trying to reduce its dependence on Europe. The EU imposed sanctions on Russia in the wake of its seizure of Crimea in 2014, and Russia doesn’t want to be locked into a single export market. It completed a major pipeline from Siberia to China in 2019, which is building up to an annual capacity of around 38 billion cubic metres and is lifting its LNG export capacity.

While Europe is the current focus of gas geopolitics, Asia, and China in particular, is delivering global growth in gas markets, with its manufacturing sector driving demand.

Australia pioneered the Chinese LNG market with a deal for it to buy supplies from Woodside brokered by Prime Minister John Howard in 2002. Australia is by far the largest supplier to China, accounting for 43% of its market in 2020.

A report by Bloomberg earlier this year indicated that two smaller Chinese LNG importers had received orders from government officials to avoid further purchases of Australian LNG, in line with the broad Chinese campaign of economic coercion of Australia. However, this hasn’t extended to the major state companies that are the principal buyers of Australian LNG.

The Department of Industry, Science, Energy and Resources says these ‘alleged directives’ haven’t materially affected Australian LNG sales to China, though it’s likely the US will seize most of the future growth in Chinese demand.

The Trump administration’s trade deal with Beijing struck early last year required China to increase its purchases of US energy (principally gas, but also coal and oil) from the 2017 level of US$7 billion to US$41 billion in 2021.

Tracking by the Peterson Institute for International Economics shows that from January to October this year, US energy exports to China have fallen far short of the target and were worth only 37% of the requirement for the year to date. Both Beijing’s attempts at coercion and the Trump-era deal, which the Biden administration has said it will enforce, will result in the US gaining LNG market share in China at Australia’s expense.

LNG: it’s a big egg, but it shouldn’t be the only one in our energy basket

Last year, Australia became the world’s largest exporter of liquefied natural gas (LNG). We’re set to stay that way for a few more years as new projects and exploration are slated for development in the Northern Territory. Demand for natural gas is soaring, especially in our region, so LNG is on its way to becoming one of our most critical exports in the short term.

Darwin’s strategic importance during this industry expansion becomes increasingly clear when we consider that Asia has the world’s fastest growing demand for gas. It’s our closest port to many of those markets.

Our gas exports underpin our relationships with key trading partners. We’re already one of the primary suppliers to the world’s biggest gas importers, such as Japan, China and South Korea; for example, 10% of Japan’s LNG imports pass through the port of Darwin. Unsurprisingly, there’s huge interest in further exploring the Northern Territory’s gas reserves, building infrastructure and expanding production.

While there’s potential for the territory to supply domestic markets, there’s a real opportunity for the federal and territory governments to support gas exports and meet Asian demand. However, we must also consider the long-term implications of exporting gas. Can we continue to rely only on gas as a primary export, and will those exports deliver sustained benefits?

Recent analysis shows that demand for gas will undoubtedly increase over the short and medium terms. Competition in the sector is also set to intensify. The global supply base for LNG is rapidly expanding outside Australia. The US is increasing its production, and new gas projects are being opened in China and Russia. In time, this is likely to challenge Australia’s leading position in the global gas market. While we’re likely to remain a leading exporter of natural gas until the mid-2020s, by then Qatar and the US will probably have dramatically increased their production and market shares.

If we look a little further into the future, demand for gas is set to peak and then plateau by the mid-2030s. Australia should continue to invest in the LNG industry, but our policymakers and the energy industry itself must be more creative and look to diversify in order to secure Australia’s position as a leading and, most importantly, reliable energy partner in our region. This may mean turning to emerging energy-production processes and technologies.

We have a clear economic incentive to do so. Based on modelling by McKinsey, renewable energy sources will account for 25% of fuel needs and more than 50% of power supply globally by 2035. Importantly, key importers of Australian gas have signalled their intent to integrate renewable energy quickly over this period.

Japan has said it will make renewables account for 22–24% of its energy needs by 2030. South Korea plans to nearly quadruple its renewable energy use by then. China will account for a significant portion of global renewables expansion in the coming decade. In Southeast Asia, ASEAN has set a target of 23% renewable energy by 2025.

Since our region will increasingly rely on renewable energy sources in addition to gas, a smart move would be to build Australia’s capacity to supply both. With our vast territory, we can do so. Swathes of northern Australia could be used for producing renewable energy. Being able to transport multiple types of energy through Darwin could cement Australia’s position as an energy superhub of the Indo-Pacific.

For example, hydrogen is likely to play a key role in future global energy consumption. Japan, the biggest importer of Australian LNG, has said that hydrogen will become a mainstream fuel domestically. Luckily, hydrogen supply chains rely on transportation infrastructure similar to that operated by the natural gas industry, such as pipelines and tankers. Current investments in the gas supply chain could, in time, be adapted as demand changes and shifts.

Such agility could make our energy supply more resilient and reliable. While CSIRO has made some progress in developing better methods for transporting hydrogen, more R&D is needed to make this a cost-efficient process.

Australian governments would find another resources boom an enticing prospect. We should invest in our strategically placed northern gas supply infrastructure, but with the long-term aim of using it to diversify our energy supply to include other sources, such as methanol, ammonia, solar and hydrogen. This will strengthen our export capacities in line with upcoming shifts in energy demand.

Setting up the necessary infrastructure and technology will require research and planning. If that doesn’t happen, in a few decades the Northern Territory will find itself unable to enter and compete in established renewable energy markets.

We need to respond to changes in market demand, and those changes are already happening.

Grasping the opportunity of LNG 2.0

How natural gas is bought and sold in the world’s scattered regional markets for the fuel is changing rapidly. A single global market for natural gas has finally arrived. Behind the evolution is improving technology for moving gas as a liquid, which means it can go to many more places rather than simply where a pipeline runs. In addition, an oversupply of gas has producers working to develop new consumers all over the world. The result is growing flexibility in previously rigid gas contracts and a global convergence in prices.

The share of gas traded by sea as liquefied natural gas (LNG) reached close to 40% of total trades in 2016. The US Energy Information Administration’s International Energy Outlook forecasts that seaborne gas will account for a bigger share of trading than pipelines by 2040. 39 countries now import LNG, up from 17 a decade ago. Several more are expected to lift the total to 46 in the next couple of years.

When global trade in LNG began in the 1960s, the cost of liquefying gas was so high that it was affordable only to developed countries such as Japan. As the technology proved reliable, LNG trade expanded, but contracts remained decades long and had non-negotiable destination clauses. Contracts are now getting shorter and starting to allow gas to be diverted to where demand is greatest.

The first week of June was momentous for global LNG trade. Several key developments demonstrate the transformation in global gas markets. During the first week of June, the first two US LNG cargoes to reach northern Europe have landed in Poland and the Netherlands. The gas came from an export terminal in Louisiana that was first out of the gate in February 2016 to exploit the US shale boom to supply the global market. This was the first-time US LNG exports landed in the liquid hubs of northwest Europe or elsewhere in northern Europe, faced with competition from domestic supply and cheap imports from Norway and Russia.

The entrance of the US onto the global LNG market is a game-changer. US LNG is a crucial way to buffer the rising influence of Russia, the largest gas exporter in the world by some margin, which supplied more than one-third of Europe’s gas last year. Seaborne gas is reducing some countries’ historic dependence on pipelines that run through potentially unfriendly territory. Poland, for instance, opened its first import terminal a year ago, lessening its reliance on gas piped from Russia. By importing US LNG, Poland just took a symbolic step forward in wresting itself from Russia’s energy dominance.

The US is also capitalising on the long struggles of Russia to supply large amounts of energy to China because the two countries have been unable to agree to prices. In late May, the US and China have announced the initial steps in their 100-day action plan of the Comprehensive Economic Dialogue, inviting Chinese companies to negotiate long-term LNG contracts from US suppliers. US supplies reaching Asia are now more practical thanks to the June 2016 expansion of the Panama Canal that lowers shipping times and prices. The agreement piles pressure on competing suppliers, including new LNG projects in Australia as well as new pipeline and LNG projects from Russia.

The timing of US LNG entry into the global market couldn’t be worse for Australia’s prospects, for example for the $54 billion Gorgon project, the world’s most expensive. Australia’s energy and resources minister Josh Frydenberg acknowledged that oversupply and low prices would hurt LNG returns, but said prices would not stay low forever: ‘the LNG projects currently under construction in Australia are being developed on the basis of a long term outlook, with 40-year average project life spans.’

Over the longer term, Australia is well-positioned to reap benefits from the flexible global gas market. Facilitated by Asian investment, Australian LNG export capacity increased significantly over the past few years and will continue to increase as new projects are brought on line. Australia is forecast to rival Qatar as the world’s largest LNG exporter by 2021.

Gas buyers see Australia as a highly reliable LNG supplier and one that supports open and transparent international markets. With European energy security strategy aimed at diversifying away from Russian supplies, Australia seems a logical new option. According to its LNG strategy, the European Union aims to step up efforts to cooperate closely with future suppliers, such as Australia, to remove obstacles to the trading of LNG on global markets. For European consumers, a diversification strategy aimed at securing long-term contracts from stable suppliers and political allies can provide a valuable insurance policy against the potential loss of Russian supplies over the longer term.

The blockade of Qatar: implications for Australia

The sudden schism between Qatar and a Saudi Arabian-led coalition has already produced wide-ranging consequences. While Qatar continues to deny charges of supporting Islamist extremism, Turkey and Iran have intervened to ease the country’s isolation. The US has a large military base in Qatar, and the Trump administration has a somewhat conflicted focus on weeding out global terrorism via dubious Saudi agency, so the stage seems set for a protracted diplomatic crisis.

If this drags on long enough, it could have significant ramifications for an area of considerable Australian interest: the global trade in liquefied natural gas (LNG). Qatar remains the world’s largest exporter of LNG, but Australia is poised to overtake it soon, following a $200 billion investment drive in new export capacity. However, Australian enthusiasm has been tempered by low international prices, local cost overruns and political fallout from a shortfall in affordable domestic supply.

With Australian production seeking to disrupt the cheaper Qatari supply, Gulf geopolitics could speed up its ascendency, potentially even preventing some projects, such as Queensland’s Gladstone, from becoming white elephants.

Despite its tiny population of 2.2 million people, Qatar has significant economic clout as a result of its massive gas supplies (and, to a lesser extent, its crude oil), which constitute about 13% of proven global reserves. Doha has long used the revenue from its gas—mainly LNG shipped to Asian markets also serviced by Australia—to support Islamist movements such as the Muslim Brotherhood.

Qatar’s support is in the form of direct funding for such groups or in the ideological backing of Al Jazeera. The state-run news network’s support for the Arab Spring uprisings was a major factor leading the Gulf Cooperation Council (GCC), led by Saudi Arabia, to cold-shoulder Qatar. Qatar’s gas-powered foreign policy was a principal motivation for the Saudis, the United Arab Emirates (UAE), Bahrain and Egypt—later joined by Yemen, Libya, the Maldives and, reportedly, several other countries—to suddenly sever diplomatic ties with the country, along with land, air and sea access.

For the blockaders, Qatar is also too close to Iran, which the other GCC members have been doing their best to isolate in recent years. The Qatar–Iran relationship is itself partly built on gas: the two countries share the massive North Field / South Spar reservoir. While that arrangement has occasionally led to disputes, a more cooperative spirit has dominated recently.

So far, the blockade hasn’t explicitly targeted Qatar’s natural gas capacities, though there have been some related impositions on that sector, including the UAE’s ban on Qatari LNG tankers using an anchorage off Fujairah. Such action will likely add delays and cost overruns but isn’t expected to stop Doha serving its customers. Continued stagnant global oil and gas prices have reflected that fact, as the glut of both resources assuages concerns about future disruptions.

While this might minimise schadenfreude in the Australian LNG sector, there’s a longer term risk of more significant disruption. For example, Qatar could stop the flow of its gas to the likes of the UAE and Egypt, which could lead to further escalations in turn. The most extreme consequence would be Cairo blocking access to the Suez Canal.

Sanctions by the wider international community, as were used to curtail Iran’s oil sector for many years, could be a game-changer. That currently seems highly unlikely, not least because of continued US interests in Qatar, but continued tit-for-tat action between the parties involved and Donald Trump’s unpredictability and single-minded obsessions—in one tweet about the blockade he referenced the possible ‘beginning of the end of the horrors of terrorism’—don’t completely discount it.

As it stands, passage through Iranian waters leaves Qatar’s access to Asia’s large and lucrative markets largely unthreatened, although continued geopolitical tensions could still inflict a massive hit on the country’s reputation as a reliable supplier. Before the blockade, Japanese companies had reportedly already been using the growth in Australian supply as a bargaining chip in negotiations with Qatar on new long-term contracts.

And it’s not only Australian businesses that want to take up the slack in any potential disruption of Qatari LNG supply and to capitalise on potential impacts on oil and gas prices in the near future. The US, for one, is also making major inroads into the export market with its excess of fracked gas. Just this month it announced that LNG shipments had arrived in the Netherlands and Poland—the first ever American LNG sent to northern and central Europe.

American exporters have made a convincing geopolitical case for weaning European countries off Russian gas. Furthermore, the US is better able than Australia to keep labour and other project costs down and to tap existing infrastructure, and the maturity of its domestic gas markets creates a much firmer business case for new investment. To top it off, Trump has promised more streamlined project development for new fossil-fuel operations, downgrading environmental and other concerns.

Added to the US threat is the continued emergence of LNG-producing countries such as Nigeria, while Russia’s Vladimir Putin has also spoken of a major push into LNG in the next few years. The most likely outcome of the blockade may therefore be a continuation of the trend toward more flexible selling arrangements, including one-off ‘spot’ purchases and short- and medium-term contracts, in which new Australian success is possible but relies on the aggressiveness of the negotiators.

Before the Saudi-led blockade, analysts had predicted a continued oversupply of gas, at least until a lack of new development owing to sustained low prices has an impact. Markets have so far failed to react to the threat to the world’s largest LNG exporter, indicating that there’s little chance of a shake-up big enough to immediately lift Australia to that rank, or to ensure a better return on investment for major Australian projects. That might take a far larger Middle Eastern geopolitical rupture than the current one—which we can, of course, never entirely discount.