Prices in Europe fluctuate amid strikes at two large LNG plants in Australia

Gas prices in Europe continue to fluctuate sharply earlier in the week amid strikes at two major LNG plants in Australia due to start on September 7th. Supply disruptions, if they do occur, will hit European consumers the hardest, as they are most dependent on the spot market.

Gas prices in Europe on August 28 rose by 8.5% to €37.75 per 1 MWh ($436 per 1,000 cubic meters), amid the development of a saga around strikes at LNG plants in Australia. So far, workers at all three Chevron facilities — the Wheatstone gas platform, the Wheatstone LNG plant, and the Gorgon LNG plant — have voted in favor of a strike that could begin on September 7th.

The scale of the strike itself is still unclear: theoretically, it could include a halt in gas production, as well as a halt in LNG shipments to tankers, but it is possible that at the first stage, employees will be limited to refusing to work overtime.

It is also possible that Chevron will be able to reach an agreement with the unions even before the strike.

Australia is the third largest LNG producer in the world after the US and Qatar. The capacity of the Wheatstone project located in Western Australia is 8.9 million tons per year, Gorgon – 15.6 million tons. This is approximately 5.1% of the installed capacity of LNG plants in the world. The main shareholders of Gorgon are Chevron (47.3%), ExxonMobil (25%) and Shell (25%). In Wheatstone, Chevron has 64.1%, KUFPEC has 13.4%, Woodside has 13%, and a number of smaller shares from Asian gas buyers. Key project markets are Japan (38%), China (28%), South Korea (15%) and Taiwan (10%).

If it comes to the shutdown of Australian plants, this will raise spot prices for LNG, first in the Asian market, and then in the Atlantic basin.

While virtually all LNG from Australia goes to Asia, it is European buyers that could be most vulnerable to a supply disruption scenario, as they are now much more dependent on the spot market than Asian companies. Thus, large Chinese traders are likely to be able to cover their needs only by stopping spot sales of a number of goods that they now receive under long-term contracts. This will be much more profitable for them than entering the spot market themselves.

The reduced capacity of the Panama Canal due to drought is already putting additional pressure on the spot market in the Asian region: some LNG tankers are forced to take a longer route around Cape Horn, which affects the price. Also, the market may be affected by the beginning of the hurricane season in the United States: for example, tropical storm Idalia formed in the Gulf of Mexico on Tuesday is expected to reach the coast of Florida and may intensify into a Category 2 hurricane. Florida authorities have already declared a state of emergency in the state.

Although the main LNG plants in the US are located to the northwest, off the coast of Texas, the storm could affect the tanker dispatch schedule.

Strikes in Australia add to the list of local LNG project risks that are increasingly being talked about in the industry. In the spring, the head of Japan’s largest oil and gas company Inpex, Takayuki Ueda, said that Australia was “quietly exiting” the LNG business. Inpex owns stakes in three Australian LNG projects and, among other investors, suffered in 2022 from the introduction of regulation on domestic gas prices in the country. The main risk in the medium term is the low proven gas reserves both in the country as a whole and within individual projects. Thus, according to Graham Bethune from OIES, the country’s largest LNG plant NWS with a capacity of 16.5 million tons of explored gas reserves in category 2P will be enough for only six years of operation. In the case of Chevron projects, this is respectively 11 years for Wheatstone and 21 years for Gorgon, with 30 years of reserves being the industry norm for such projects.

At the same time, against the background of low reserves, demand for gas in Australia, including in the energy sector, is growing, which leads to price crises (for example, in the winter of 2022) and forces the authorities of individual states and the federal government to regulate prices. “From a fundamental point of view, Australia is not maintaining gas reserves at a level that would allow production to continue at the current pace, despite high prices,” says Graham Bethune. “In addition, huge uncertainty about the future of gas is pushing its producers in Australia, as elsewhere, to redirect funds from exploration and development to clean energy or return them to shareholders.”

Yuri Barsukov