Volatile future

Building on its good reputation, Australia is projected to provide around 40% of both Japan and China's LNG and 25% of South Korea's by 2019-2020. And this could set us up to become the world's largest LNG exporter over the next five years: between 2013-14 and 2019-20, export volumes are projected to almost quardruple - from 23.2 million tonnes to 80 million tonnes - while earnings are estimated to more than double - from $18 billion to $45 billion. It will be the main driver of further grwoth in total resources export earnings, which are projected to reach $235 billion (in 2015-16 dollars) by 2019-20.

The basic assumption underlying this positive outlook is straight forward: as non-OECD countries develop, electricity consumption rises and should drive increases in overall demand for gas.

However, in reality the global gas market is becoming increasingly volatile and hence the prospects for Australia's gas producers are marred with many uncertainties.

Take for example India. Despite projected strong increases in demand, its supply of gas is relatively concentrated and demand is very sensitive to higher gas prices. The country could also increase its domestic gas production. Together this makes it difficult to project how Australia could benefit from India's growing electricity demand.

Therefore, India may buy little more LNG from Australia than the already contracted volumes from the Gorgon project. But circumstances may change and if Australian projects can deliver LNG at competitive prices it could very well play a more significant a role in India's expanding gas market.

The Indian example highlights how complex the LNG market has become, also as the main expansion of LNG demand will be in countries that have or are developing alternative sources of gas supply.

At present, there are significant headwinds for the industry, including the downward pressure on commodity prices.

The problem is there is excess capacity in the market, and major export projects currently under construction in Australia and the US are about to come online. "As a result, LNG prices are likely to remain subdued for some time," the report concludes.

The uncertainties around the global energy and economic future has set off a trend away from long term LNG contracts towards more flexible arrangements, with strong increases in shorter term LNG trades.

This is a difficult environment for an industry that has to cope with very high capital costs.

Demand growth over the next five years will still be strong, but from then on the prospects for gas are far less clear.

Notably, alternative energy sources, including renewables, are emerging and there fate is very much dependent on the direction of future global environmental and economic policies, which are difficult to foresee.

In the end, for gas suppliers in an increasingly crowded market cost competitiveness will be a major key to realise the 'golden age of gas', as put forward by the IEA in its 2011 World Energy Outlook.

For Australia, though, this scenario is currently looking somewhat shaky.

Australia's gas industry is strongly tied to two major markets, China and India, and their future economic trajectory is anyones guess. How much China's economy already determines global energy markets was at display over the last decade, as the country's expansion drove demand increases for oil. As a result, for five years over the past decade, global expenditure on crude oil exceeded 4% of global GDP, which compares to around 2% before China's boom. China's economy is now slowing and new supplies for oil have entered the market, driving down prices.

China and India have still a lot of room for growth, though - especially in their electricity use.

The IEA's World Energy Outlook 2015 projects that world energy consumption out to 2014 will increase by 32%, with one-third of this growth occurring in China, and India the main driving force beyond 2025.

Around 82% of the world's population resides in non-OECD countries. Per person they use roughly 2100 kilowatt hours per person, compared to 8600 kilowatt hourse per person in the OECD.

The question, though, remains: how will this likely growth in electricity consumption be met?

Gas accounts for around 18% of total primary energy consumption (2013-14), but this highly variable across states - ranging from 10% in New South Wales and 35% in South Australia.

Most of the domestic use is by industry (44%), followed by electricity production (30%) and the residential & commercial sector. However, demand is projected to decline, by 23% by 2024.

Domestic and the international markets for gas and LNG, mainly produced from Queensland's coal seam gas (CSG) reserves, are now linked - so why are domestic prices for gas not coming down?

According to the report, the main factor behind this is the significant increase in uncertainty as a result of the interconnection to international LNG markets.

The greatest volumes of the eastern Australian gas supply are now coming from Queensland's Surat/Bowen reserves (2014-15), after the market was peviously dominated by supply from Victoria's offshore basins.

By their nature, there is more uncertainty about CSG reserves compared to conventional gas reserves, the report says. Despite the fact that the LNG projects have access to substantial proven and probable reserves, the reality is that the productivity and the cost of production for these reserves will become more uncertain over time. And this does not even account for potential social concerns.