PERTH (miningweekly.com) – While delivering record gas and petroleum production in 2015, Australia’s energy sector was facing a challenging 2015 with a lower oil price environment and uncertainty over gas pricing on the east coast, market analyst EnergyQuest reported this week.

EnergyQuest CEO Dr Graeme Bethune said Australian domestic gas production increased by 2% in 2014 to a record 1 134 PJ, and that liquefied natural gas (LNG) output was a record 24.7-million tonnes. Total 2014 oil and gas investment was only slightly below the record levels of 2013, with $4.2-billion exploration spending and $57-billion development spending (36% of national private new capital expenditure) incurred.

Australian oil production increased by 18.1% in 2014 to 84.3-million barrels owing to the restart of the Vincent project, in Western Australia, higher production from Pyrenees, Bass Strait, in Victoria and Montara, also in Western Australia, and the start-up of Balnaves.

Australian petroleum production was 6% higher in 2014 at a record 544.7-million barrels of oil equivalent. Overall, petroleum production reached record levels and spending on new LNG projects continued at elevated levels as new projects neared completion.

Bethune noted, however, that the slump in the oil price had cast a pall over the new LNG achievements, such as the first seven shipments from the BG Group’s new Queensland Curtis LNG project in Gladstone. It also created widespread uncertainty for those in the industry who had worked hard over the past five years to establish a new Australian LNG frontier.

“It is not only the oil price, however, that is creating challenges. Use of gas is facing challenges in many countries,” Bethune said.

“China was seen as the big opportunity for LNG, a bottomless pit of gas demand to reduce pollution. However, the iron laws of economics apply in China as they do everywhere else and higher Chinese gas prices are reducing growth in demand.

“We expect that demand in the Australia’s domestic gas market will actually fall, with the Australian Energy Market Operator suggesting higher prices will reduce east coast demand by around 200 PJ by 2020.”

Bethune noted that unlike oil, gas had numerous substitutes, making demand sensitive to price.

“An important question for 2015 is whether and how the fall in oil prices and LNG prices may affect Australia’s east coast gas market, particularly its pricing.

“The east coast is now connected to international markets so it is inconceivable that lower international oil and gas prices would have no impact on the domestic market.”

Bethune stated that east coast gas would no longer be immune to downward pressures on global oil prices, adding that the historic theories that a company could make more money from selling gas for high prices in Asia than by selling it domestically was no longer viable.

“Oil-linked LNG prices have fallen with the oil price and LNG spot prices have fallen even further. This takes some of the pressure off demand for local gas for Australia’s new LNG plants. It also reduces the price expectations of LNG producers and their ability to pay for local gas,” Bethune said.

At the same time, the fall in gas-use for power generation also takes pressure off the domestic market.

“In EnergyQuest’s view, our conclusion from all of these emerging market factors is that east coast domestic gas prices are still going to be higher than historically - but more like A$6/GJ to A$7/GJ rather than A$9/GJ to A$10/GJ and will be driven by cost of production.”