By This blog was written by Julien Vincent, Executive Director of Market Forces Australia, for the 2016 Fossil Fuel Finance Report Card: Shorting the Climate.
Over the past five years, Australia has been chasing a dream: to become the world’s number one exporter of LNG. This pursuit has mirrored many of the recent mistakes of coal exporters, and the dream is becoming a nightmare, both environmentally and economically.
LNG export plants do not come cheap. The six largest projects in Australia now amount to over AU$200 billion, with Chevron’s Gorgon LNG project alone wearing a AU$72 billion price tag. Cost overruns and delays have made matters worse — a 20% cost blowout and a 12-month delay would be an LNG plant performing relatively well. Banks have been heavily relied upon to finance this LNG export construction boom: the Ichthys project near Darwin was financed with the largest debt package in Australian history (US$20 billion from over 40 institutions), while the U.S. Export Import Bank, China’s Export Import Bank, and a host of U.S., European, Asian, and Australian banks are exposed to the three LNG export plants recently built on Curtis Island, off the coast of Gladstone.
The rush to be part of the anticipated LNG boom has saddled many project proponents with billions of dollars in debt. The delays and cost blowouts have not helped, and if proponents had expected light at the end of the tunnel, the completion of many LNG projects has arrived as the oil price fell by almost 70% in two years. In 2014 and 2015, both Origin Energy and Santos, owners of LNG export plants on Curtis Island, received credit downgrades from Standard and Poor’s as the ratings agency acknowledged the companies’ major debt burdens (a result of the LNG buildout) and exposure to a weak oil/LNG price. In January 2016, Santos was downgraded a second time to BBB-, joining Origin at one level above junk grade.
The energy intense Ichthys LNG project in the Northern Territory is expected to produce 7.7 million tons per year, on average, of CO2 before the gas even leaves Australia. Queensland’s LNG plants can expect to have an even greater footprint, given that the source is unconventional coal seam gas, which produces large amounts of fugitive methane emissions. The extraction of coal seam gas, often through highly intensive methods such as fracking, is also a major risk to agricultural communities and water resources in Australia’s food bowl.
In addition, the three recently constructed LNG plants on Curtis Island near Gladstone are in the Great Barrier Reef World Heritage Area. Dredging and dumping to facilitate construction caused massive environmental damage to Gladstone Harbour. Such was the environmental damage to the World Heritage Site that an emergency monitoring mission from UNESCO visited the Reef in 2012, scathing of the decision to approve the LNG plants.
Australia’s LNG export industry has mirrored the coal industry’s mistakes of recent years: rush to seize an apparent boom, heavily overinvest at high cost, and build far more supply capacity than is likely to be needed. The prospect of the United States attempting its own LNG buildout to supply a global market will be even worse news for Australian producers, while the potential for increased supply from Australia will undercut the market for new U.S. entrants. Either way, it is likely that major, multi-billion-dollar stranded assets have already been built.