RBA: LNG to influence Australian economy in various ways
Australian exports of LNG are expected to pick up substantially as a number of large-scale LNG projects begin production over the next few years, according to RBA analysts.
This follows investment of approximately $200 billion – equivalent to around 12 per cent of annual Australian GDP – which was largely in response to increased Asian demand for LNG. In value terms, LNG is expected to become Australia’s second largest commodity export (after iron ore) by 2018, with the bulk of these exports destined for Asian markets.
In a report by Reserve Bank of Australia’s analysts Natasha Cassidy and Mitch Kosev, factors that are likely to influence the LNG market in the Asia-Pacific region over the period ahead are being discussed, as well as the channels through which developments in the Australian LNG sector affect the domestic economy.
Most of Australia’s current LNG production is exported to Asia; more than 80 percent is exported to Japan, while China and Korea account for much of the remaining share. The LNG from Australian projects under construction is also committed to Asian purchasers under long-term contracts, albeit with more diversification in the destination of these exports. However, some projects under construction have volumes that are not yet under contract, as well as volumes assigned to the producer’s own portfolio the ultimate destinations for these LNG cargoes are uncertain, stands in the report.
RBA said that its current estimates (under the assumption that the production ramp-up for projects proceeds as publicly indicated) suggest that China will purchase around 20 percent of Australian LNG exports under contract by 2020, while the share of exports to Japan under contract will fall to around 45 percent. The share of exports to other regional trading partners will also rise, with small increases in exports to Malaysia, India and Taiwan.
There are a number of factors that are likely to affect the dynamics of the Asia-Pacific LNG market in the medium term. US LNG supply is expected to increase considerably as technological advancements and a period of high energy prices have led to a dramatic increase in assessments of recoverable resources of natural gas and oil from unconventional sources. This has spurred a rapid surge in unconventional natural gas and oil production, which is expected to result in US natural gas production exceeding domestic consumption by 2017, RBA said.
The decline in LNG investment and ramp-up in LNG production and exports is expected to affect Australian economic output (real GDP) and national income in a number of ways, stands in the report. LNG investment contributed an estimated ¼ percentage point on average to Australian annual GDP growth between 2008 and 2013, once the high share of imported inputs used to construct these projects is taken into consideration. The peak in LNG investment was in late 2013, and the continued falls in LNG-related investment will subtract from GDP growth in the next few years as the construction of large-scale projects is gradually completed. As the projects begin to ramp up production, the Bank currently estimates that LNG exports will contribute around ¾ percentage point to GDP growth in 2016/17.
The effect on Australian living standards will be less noticeable given the low employment intensity of LNG production, the high level of foreign ownership of the LNG industry and, in the near term, the use of deductions on taxation payments.
LNG World News Staff; Image: Woodside