The rapid development of Australia’s vast natural gas reserves may be slowing from the breakneck pace set in recent years. But the land down under certainly will continue to grow in importance as a major liquefied natural gas (LNG) supplier, according to industry observers.

Just what’s under construction now could make Australia the world’s leading LNG exporter in the next decade.

There are several reasons for the change of pace, according to Andrew McManus, head of the Australia upstream consulting business for Wood Mackenzie. In a presentation on the future of Australia’s gas industry, he told the recent Australian Petroleum Production and Exploration Association (APPEA) conference in Brisbane that the nation faces a hiatus in new LNG projects.

McManus said the focus of worldwide LNG buyers, for now, has turned to the U.S., where two world-scale LNG-export operations have been approved and are under construction on the Gulf of Mexico.

The U.S. offers customers potentially lower cost, more flexible delivery and the opportunity to diversify LNG importers’ supply portfolios, he said.

“There are five key issues driving buyer motivations in the current market: supply portfolio diversification, exposure to Henry Hub (Louisiana) pricing, greater flexibility in contract terms, projects that can be sanctioned quickly and access to upstream equity,” McManus said in a statement. “For these reasons, the U.S. supply has become the most favorable near-term option, which is for deals where supply is expected to start pre-2020.”

But the world’s LNG demand grows, and that means there may be markets for all key exporters. That’s good news not only for the U.S. and Australia, but for exporters in Canada, East Africa and Russia. Opportunities for new Australian projects will be challenged, and its higher operating costs will need to be controlled for new projects to be competitive with the emerging suppliers, McManus added.

That strong customer focus on supply diversity means that any new Australian liquefaction capacity is likely to be smaller in scale than the large, world-class LNG developments Australia has seen in recent years—and probably limited to expansion of existing land-based and floating liquefaction operations.

“Australia has had a remarkable few years of LNG build. It has gone from contributing 7% of global LNG supply in 2000 to an expected 25% of the global market by 2018. Buyers have increased their exposure to Australia during the period, as Australia has been the only material supply option available,” McManus said. “It is inevitable that markets like China and Japan, which are major Australian LNG off-takers, may now seek to diversify their supply options.”

Curtis Island

Consider the liquefaction complex developing on Queensland’s Curtis Island along the eastern Australia coast. Three huge liquefaction plants, which adjoin each other, are under construction simultaneously. Those facilities represent $60 billion in investments by a host of the world’s premier energy companies. Each is being constructed initially with two liquefaction trains that will deliver 25 million tons per annum (mtpa) of LNG by 2015.

A fourth facility is being considered for sanctioning on Curtis Island. It could add another 8 million mtpa, and a fifth nearby is proposed.

Asia’s voracious gas appetite may devour it all. Global energy demand is projected to grow 30% between 2010 and 2035, with much of that coming from Asia. By 2016, when Curtis Island’s first six LNG trains go online, demand for Australian gas will leap by 300%, an additional 3.8 billion cubic feet of gas supply per day.

That’s a lot of gas. Estimates are that 36,000 wells will be needed to support the projects through their lives—creating a massive challenge for Australia’s midstream. Adding to the work in Queensland are huge LNG projects on the coasts of the Northern Territory and Western Australia. Australia’s midstream future looks daunting.

Costs are a chief concern of the industry, AAPEA Chairman David Knox told the Brisbane meeting. “In this competitive environment, the cost of building new LNG projects in Australia has increased significantly over the past decade and is now around 20%-30% higher than that of the global competition,” he said.

The cost of a new Australian LNG development must include production platforms and wells in the field—plus midstream gathering and transportation pipelines. Much of that infrastructure is already in place in key U.S.- and Canadian-producing areas, making North American liquefaction projects cost competitive to greenfield projects in Australia and elsewhere.

Monetizing reserves

The cost of monetizing Australia’s gas reserves is escalating rapidly. For example, costs for the LNG facility on Barrow Island on Western Australia’s Northwest Shelf have skyrocketed to $52 billion—the highest price for any single LNG operation worldwide.

But the overall future of Australia’s LNG business remains very bright, emphasizes David Byers, AAPEA chief executive.

He told attendees at a Houston energy conference sponsored by the Australian American Chamber of Commerce, held earlier this year, that the nation’s “broader resources boom” may be cooling. However, he said that strong Asian demand growth, coupled with Australia’s good supplier track record and uncommitted gas reserves, are in its favor.

He added that there is a “positive outlook for Australian LNG,” and it will continue to be a significant sector in the performance of the national economy.

Challenges include a skilled labor shortage, government regulatory and taxing instability, environmental “green tape” concerns, labor productivity and a “social license to operate” from the public. Combined, the result is Australia’s higher liquefaction pricetag relative to competitors.

At the recent AAPEA Brisbane conference, Byers noted that “LNG projects are complex, extremely costly and require a decades-long horizon. But such projects will underpin Australia’s economy for decades to come. Our LNG industry is a source of comparative advantage that should be harnessed, not hindered.”

Yes, the island continent has its advantages, and a primary one is gas reserves. Multiple estimates show its hydrocarbon resource base to be huge—reserves that could easily supply Australia’s big LNG business for many years to come.

The Australian chamber provided the Houston conference with numbers that indicate estimated gas reserves of 819 trillion cubic feet (Tcf). The largest share of those reserves are in unconventional shale plays, which the chamber estimated at 396 Tcf. The chamber estimated Australia could export 2.2 Tcf of gas per year by 2020—exceeding the nation’s domestic gas demand of around 1.8 Tcf per year.

Coal gas

Coal-seam gas provides a major gas reserves source with development of coal-based gas reserves dating from the 1990s. Australia is an established coal producer and exporter.

Many industry observers say those current gas reserve estimates probably are on the modest side. Exploration of the continent—roughly the size of the Lower 48 states—has been comparatively light to date, and there could be a lot out there yet to be found.

The AAPEA’s Knox observed that “our explorers continue to find gas in large quantities in all the hydrocarbon basins. The industry is innovative. It has the capacity to make bold investments.”

Drilling and proving those reserves is an upstream problem. Next comes midstream’s assignment of getting all the production to market, whether end users are domestic or liquefaction plants will send it overseas.

Distances are vast—Sydney and Alice Springs are roughly as far apart as New York City and Tulsa, Oklahoma. Domestic markets are comparatively small.

David Wrench, managing director of Strike Energy Ltd., told the Houston conference a lack of midstream infrastructure presents a major obstacle for further development of Australia’s reserves. He mentioned as well a limited supply of equipment, services and markets—even in established, productive basins.

On top of that, there is “huge onshore potential for unconventional,” Jeff Haworth, director of technology for the petroleum division of Western Australia’s department of mines and petroleum, said in a meeting with Hart Energy editors.

‘Tyranny of distance’

Haworth mentioned “the tyranny of distance” between reserves and markets. He pointed out Western Australia is three-and-a-half times the size of Texas. “Perth is the most remote capital city in the world,” he added.

Strike Energy’s Wrench quoted The Australian newspaper in its conference presentation that “gas supply contract availability for 2013-14 is very tight, and for 2015 and beyond not available” for large industrial customers in Queensland. Domestic gas goes in the A$9 per thousand cubic feet (mcf) range.”

But the newspaper went on to quote a 2012 Wood Mackenzie study that shows Australia will tie world LNG export-leader Qatar when all of Australia’s liquefaction plants under construction go on stream in the next few years.

Some operators believe Australia is about 10 years behind the U.S. in unconventional play development, and that its pace of development will be more measured. But none doubt Australia’s unconventional resources are abundant.

Diana Hoff, vice president, technical and engineering for producer Santos Ltd., says “it’s an exciting time to be in Australia. We’re trying to cram into five or 10 years what took us 25 in the U.S. It’s not without its challenges, but it’s a fun time to work here. We wouldn’t have the shale and tight gas if it weren’t for the LNG projects.”

Many in the industry are quick to point out that gas prices—high compared to current levels in North America—are the only way to make development of those vast reserves work. The AAPEA’s Knox emphasized in his Brisbane conference presentation that “gas once thought to be stranded, either due to the lack of technology or infrastructure, is now finding a market—through LNG.”

He added, “the Australian oil and gas industry has tackled challenges to its future before, and we continue to do so on a daily basis. Our challenge to remain competitive and to successfully attract the next wave of LNG investment is a real one—and responding to it is urgent.”

Hart Energy editors Scott Weeden and Steve Toon contributed to this report.

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