Toxic gas

Gas faces a lost decade as customers dry up

Liquefied natural gas (LNG) was once tipped as the clean fuel of the future. Judging by the number of oil and gas companies slamming the brakes on investment into building new capacity, it has quickly become toxic for investors.

Faced with a struggle to find long-term LNG customers in Asia, Woodside Petroleum (WPL.AX) and its partners on March 23 decided it was too risky to progress with a $30 billion project to develop the giant Browse LNG project off the coast of its native Australia. It could be another decade before the market recovers sufficiently enough to justify resurrecting the project - or, for that matter, the prospects for developing significant new LNG supply globally.

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Building plants to chill natural gas is expensive, as is transporting the commodity to energy-hungry markets via ocean-going tankers. Projects take years to develop, and investing in them is a long-term bet on demand. Developers deal with the insecurity in two ways: retaining the flexibility to cut project sizes, and locking in sales to customers for the resulting gas for up to 20 years via long-term contracts.

Neither of these hedges is sufficiently comforting in Woodside's case. Browse, located about 425 kilometres off the north-west coast of Australia, has already been re-jigged so the scheme runs entirely offshore. That's saved 35 percent of projected costs, but finding further savings would be tougher.

A bigger problem is demand. Key markets in China, South Korea and Japan have slowed, and the collapse in oil prices has hit projected revenues. Worse, securing the all-important long-term customers to buy gas contracts has been complicated by a price war launched by Australia's main LNG rival, Qatargas. In response to the Aussie LNG challenge and weakening demand growth, the Qataris have increasingly sold discounted excess supply into the spot market for the fuel.

Browse's fate is a bad signal for growth in the wider Australian LNG sector. With the possibility that demand growth in Asia won't pick up until after 2023, now is not the time for investors to bet on LNG.