BREE - Mar 2014 - Resource and Energy Quarterly

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Resources and EnergyQuarterlyMarch Quarter 2014

bree.gov.au


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March Quarter 2014

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ii Resources and Energy Quarterly March 2014

AcknowledgementsIndividual commodity outlooks have identified BREE authors. Document design and production was undertaken by TomShael and Simon Cowling.

Cover image source: Shutterstock.

BREE 2014, Resources and Energy Quarterly, March Quarter 2014, BREE, Canberra, March 2014.

Commonwealth of Australia 2014

This work is copyright, the copyright being owned by the Commonwealth of Australia . The Commonwealth of Australia has,however, decided that, consistent with the need for free and open re-use and adaptation, public sector information shouldbe licensed by agencies under the Creative Commons BY standard as the default position. The material in this publication isavailable for use according to the Creative Commons BY licensing protocol whereby when a work is copied or redistributed,the Commonwealth of Australia (and any other nominated parties) must be credited and the source linked to by the user.It is recommended that users wishing to make copies from BREE publications contact the Executive Director, Bureau ofResources and Energy Economics (BREE). This is especially important where a publication contains material in respect ofwhich the copyright is held by a party other than the Commonwealth of Australia as the Creative Commons licence may notbe acceptable to those copyright owners.

The Australian Government acting through BREE has exercised due care and ski ll in the preparation and compilation of theinformation and data set out in this publication. Notwithstanding, BREE, its employees and advisers disclaim all liability,including liability for negligence, for any loss, damage, injury, expense or cost incurred by any person as a result of accessing,using or relying upon any of the information or data set out in this publication to the maximum extent permitted by law.

ISSN 1839-499X (Print)

ISSN 1839-5007 (Online)

Vol. 3, no. 3

Postal address:Bureau of Resources and Energy EconomicsGPO Box 1564Canberra ACT 2601 Australia

Email: [email protected]: www.bree.gov.au
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Resources and Energy Quarterly March 2014 iii

Foreword

The Resources and Energy Quarterly provides data on the per formance of Australias resourcesand energy sectors and analysis of key commodity markets. This edition of the Resources and

Energy Quarterly contains an update to BREEs medium-term commodity forecasts over theperiod to 2019. There are also two articles discussing the energy transition in Japan, South

Korea and Chinese Taipei and developments in the Asia-Pacific LNG market.

The outlook for the world economy is projected to be largely positive, which will continue tosupport growth in resources and energy demand. While slowing, Chinas economy is expected

to expand by more than 7 per cent a year over the medium term and there are indications thatin the short term their capital investment will not abate. An expected recovery in economic

activity in some OECD economies will provide further support to demand.

In Australia, the resources boom is transitioning from the investment phase to the production

phase as the large number of projects developed over the past few years start operation. Thisis expected to result in increased production and thus exports for a number of commodities.

Lower prices for most commodities over the past year have put greater pressure on theprofitability and competitiveness of some Australian producers. However, the Australian

industry is expected to remain fairly resilient over the medium term.

BREE projects Australias earnings from resources and energy commodities to increase at anaverage rate of 8 per cent a year from 201314 to total $284 billion in 201819. Higher export

earnings will be driven by the substantial growth in volumes of a number of commoditiesdespite near term softness in prices. In the short term, higher volumes of iron ore and coal will

be the principal drivers of export growth. As new LNG production capacity comes online overthe outlook period, LNG exports will increase to become one of Australias principal exports

and support further growth in export earnings.

The transition from the investment to production phase of the mining boom will providesubstantial benefits to the Australian economy through higher export revenues. However,

competitive pressures will be evident for Australian producers over the near to medium term,which will temper the contribution of the sector to economic growth. Nevertheless, the

medium term outlook still remains positive with the energy and resources sector providingsignificant opportunities for Australia.

Bruce Wilson

Executive DirectorBureau of Resources and Energy Economics


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iv Resources and Energy Quarterly March 2014

Contents

Foreword iii

Macroeconomic outlook 1

Energy outlook 13

Oil 13Gas 22

Thermal coal 36Uranium 49

Resources outlook 57

Steel and steel-making raw materials 57Gold 71

Aluminium 77Copper 88

Nickel 96Zinc 100

Reviews 104

Japan, South Korea and Chinese Taipei: energy markets in transition 105The Asia-Pacific LNG market: recent past and medium-term outlook 141

Statistical tables 159

BREE contacts 206


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Resources and Energy Quarterly March 2014 1

Macroeconomic outlook

The global economy

In overall terms the global economic outlook is significantly more positive and robust than thistime last year. While the world economy grew more slowly in 2013 (2.9 per cent) compared

to 2012 (3.2 per cent), signs of sustained recovery in key OCED economies combined withstronger overall growth in emerging economies, provide an encouraging picture of continued

improvement over the next few years.

Global economic growth is expected to rebound strongly to 3.4 per cent in 2014 withemerging economies continuing to provide the largest contribution, growing in aggregate

terms by 4.7 per cent, up from 4.5 per cent in 2013. Importantly the stronger performance ofOECD economies will begin to somewhat rebalance global economic patterns reducing to

some extent the dominance of emerging economies in key markets that has been evidentsince the Global Financial Crisis (GFC). As key EU economies move further away from recession

and US growth accelerates the OECD region is assumed to grow at 2.2 per cent in 2014, upfrom 1.2 per cent the previous year.

Figure 1: World economic growth

-1

1

2

3

4

5

6

1999 2003 2007 2011 2015 2019

%

Sources: IMF; BREE.


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2 Resources and Energy Quarterly March 2014

Table 1: Key world macroeconomic assumptions

% 2013 2014 a 2015 a 2016 a 2017 a 2018 a 2019 a

Economic growth b

OECD 1.2 2.2 2.5 2.5 2.6 2.6 2.6

United States 1.9 2.7 2.8 3.0 3.0 3.0 3.0Japan 1.6 1.1 1.5 1.5 1.5 2.0 2.0

European Union 27 0.1 1.0 1.4 1.5 1.5 2.0 2.0

Germany 0.4 1.7 2.0 2.0 2.0 2.0 2.0

France 0.3 0.8 1.2 1.5 2.0 2.0 2.0

United Kingdom 1.9 2.2 2.5 2.5 2.5 2.5 2.5

South Korea 2.8 3.5 3.5 3.5 3.5 3.5 3.5

New Zealand 2.4 2.9 2.5 2.5 2.5 2.5 2.5

Emerging economies 4.5 4.7 5.0 5.3 5.3 5.5 5.5

Non-OECD Asia 6.3 6.3 6.5 6.7 6.7 6.7 6.7

South East Asia d 5.0 5.3 5.5 5.5 5.5 5.5 5.5

China e 7.7 7.4 7.2 7.2 7.2 7.2 7.2

Chinese Taipei 2.2 3.0 3.5 3.5 3.5 3.5 3.5

India 3.8 4.2 4.5 5.0 5.0 5.0 5.0

Latin America 2.7 3.1 3.5 3.5 3.5 3.5 3.5

Middle East 2.3 3.6 4.0 4.0 4.0 4.0 4.0

World c 2.9 3.4 3.8 3.8 4.0 4.0 4.0

Inflation rate b

United States 1.5 2.3 2.3 2.3 2.3 2.3 2.3

a BREE assumption. bChange from previous period. c Weighted using 2012 purchasing power parity (PPP) valuation of country grossdomestic product by IMF. d Indonesia, Malaysia, the Philippines, Thailand and Vietnam. e Excludes Hong Kong.Sources: BREE; ABS; IMF; OECD.

Within this generally positive outlook there are several key swing factors that will be critical inshaping global outcomes in 2014 (and beyond). These include the degree to which thetapering of the US Federal Reserves quantitative easing (QE3) package af fects the sustainability

of US growth and/or induces flow-on capital or currency impacts in emerging markets. Chinasreform agenda also remains critical for building a sustainable long-term foundation for its

ongoing economic development although implementation is not without risks, including forits trade partners. These issues are discussed in greater detail in the key economic overviewsbelow.

Over the period to 2019 world economic growth is assumed to rise to around 4.0 per cent

with growth in emerging and OECD economies to further recover rising to 5.5 per cent and2.6 per cent, respectively. As shown in Table 1 emerging economy growth is expected to

be driven by stronger growth in Asian economies while a strong US economy along witha steadily improving performance in key EU and Japanese economies underpin the OECD

recovery. The ability of the US to pay down large accumulated debts and Chinas ability tomaintain economic momentum through a steady growth trajectory of between 7 to 8 per cent

a year while also successfully implementing reforms will continue to be the largest sources ofuncertainty in the longer term outlook.


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Outlook for key economies

The US

Despite nervous beginnings in 2013 the US economy is now showing clear signs of sustainedrecovery which is expected to strengthen through 2014. US GDP grew by 1.9 per cent in 2013

despite the effects of the Government close down due to the budget sequester. Growth alsopicked up strongly in the second half of the year with annualised rates in the last two quarters

at over 2.5 per cent.

The Federal Reserves Open Market Committee (FOMC) announced the commencement oftapering of QE3 in December 2013, cutting monthly bond purchases from US$85 billion to

US$75 billion. A second tapering was announced in January 2014 with a further US$10 billionreduction and a subsequent US$10 billion tapering in March 2014. FOMC statements following

the announced March 2014 taper also indicated the timing cash rate increases may be soonerthan previously expected.

Most US macroeconomic indicators have remained positive since the first FOMC decision with

solid employment growth and investment and construction activity holding up well allowingfor the effects of the severe Northern winter. In the December quarter production of consumer

durables rose 9 per cent year-on-year and exports were up 5.4 per cent. At the same timeinflation has remained below FOMC targets at around 1.5 per cent in 2013 and gives plenty of

room for QE3 to continue, albeit at lower rates, through 2014.

Over the outlook period to 2019, US GDP is projected to strengthen with average growth ofaround 3.0 per cent a year. The availability of low-cost energy and skilled labour combined

with spare plant capacity is revitalising its manufacturing base. The US also has significantpotential for further oil and gas exports in the future. Sustained low interest rates aresupporting a recovery in housing construction. While still below inflated pre-GFC levels, this

recovery is expected to remain positive through the outlook period.

A key challenge for the US will be impasses between the Congress and Executive over theFederal budget. While the 2014 budget has been passed and removes the more immediate

risk of program and agency closures the debt ceiling will need to be raised again in 2015 andmay be the focal point for another political showdown. A rapidly shrinking budget deficit has

removed some of the pressure in this debate with the deficit projected to fall from US$680billion in 2013 to US$514 billion (or 3 per cent of GDP) in 2014. Lower increases in spending

combined with a recovery in government revenues also point to a strengthening economy.


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China

While the robustness of the Chinese economy continues to attract considerable media

speculation, its national economic performance remains strong with annual GDP growth of

7.7 per cent in 2013, effectively matching the 7.8 per cent growth reported in 2012. It is notablethat the small reduction in the annual rate of growth masked what was a larger absoluteincrease in GDP last year than was seen between 2011 and 2012. This expansion was roughly

equivalent to two thirds of the entire Australian economy in 2013.

The continued rapid expansion of the worlds second largest economy means that China isplaying an increasingly important role in global commodity markets. For most resource and

energy commodities, China now accounts for over 40 per cent of world consumption. Forthis reason prices in global and regional markets are expected to remain highly sensitive to

variations in macroeconomic indicators relating to Chinese consumption and production.

For example, given the usual disruptive impact of Chinese New Year, the market reactions tothe large announced decreases in exports and industrial activity over January and Februaryare perhaps a little overstated. It remains challenging to look through the impact of these

short term market fluctuations and identify more significant changes in Chinas economicdevelopment.

In defining its blueprint for achieving an economic pivot towards a more consumption based

economy the new Chinese leadership have set several headline economic targets or goals,including the overall 7.5 per cent GDP growth target and a 17 per cent limit for growth in Fixed

Asset Investment. Maintaining solid employment growth across Chinas rapidly urbanisation

economy completes the policy trifecta set down by the Central Government. Simultaneouslyachieving these goals will be challenging. Investment remained the principal source ofeconomic growth in 2013, accounting for 4.2 per cent of GDP growth. Relatively lacklustre first

quarter economic indicators appear to support the view that credit restrictions that have beenthe primary mechanism for implementing industrial rationalisation have also led to a down

turn in investment activity.

In the medium to longer term the wider financial reforms will have an important and positiveimpact on the economy. Proposed easing of capital and currency controls in particular will be

a big step forward towards more liberalised markets that allocate resources more ef ficiently.However, in the short term, this may expose a number of loss-making enterprises with a

resultant closure of inefficient capacity.


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Chinas first corporate bond default occurred in March 2014 when solar-cell producer ShanghaiChaori Solar Energy missed a deadline to make an interest payment of 89.8 million Yuan. This

has led a rapid change in market sentiment with the fear of further defaults in the wake ofGovernment financial sector reforms reflected in sharp falls in commodity prices, particular

those used as collateral in financing such as iron ore and copper. Given the small proportion ofcompanies considered to be genuinely at risk this speculation is likely to be more de-stabilising

than the impact of actual defaults and realised bad loans.

Maintaining a GDP growth trajectory of around 7.5 per cent along with solid employmentgrowth to promote the Governments social objectives will likely require the eventual

relaxation of credit constraining policies or additional targeted stimulus actions. Policies, suchas the recently announced urbanisation package that will support a further 100 million people

relocating to cities over the next few years, are expected to remain a key driver of economicgrowth in the medium term.

Over the outlook period GDP growth is assumed to moderate further and average around7.2 cent. While at the lower end of the growth target range this nonetheless continues to

represent a substantial year-on-year increase in demand for resource and energy commoditieswith Chinas GDP tipped to exceed 10 trillion Yuan within the next two years.

India

Economic growth in India during 2013 was below potential with GDP increasing by 3.8 percent. The ripple effect of the US Federal Reserves QE3 tapering resulted in a depreciation of

the Rupee and as a result Indian interest rates have been increased to avoid further currencydebasement. First quarter GDP growth in calendar year 2014 has also remained subdued with

minimal fiscal spending in the lead up to elections in May. Expectations for the remainder ofthe year are more positive with an anticipated jump in business and consumer confidence on

the back of a clear election outcome. As a result GDP growth is assumed to recover to around4.2 per cent for 2014.

In the medium term Indias growing current account deficit is a challenge, particularly with

the ongoing risk of currency depreciation. However a stronger economic performance will besupported by increasing investment particularly in infrastructure and energy, a decreasing rate

of inflation and higher exports in line with an improving global economy. This should begin to

reduce Indias current account deficit as a proportion of GDP. Over the outlook period IndiasGDP growth rate is assumed to further strengthen over the outlook period to around 5 percent.


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Japan

Japans return-to-growth strategy of monetary easing, flexible fiscal policy and structural

reform was announced by the new Government in late 2012 (so called Abenomics). It is aimed

at ending Japans record of chronic deflation and weak economic growth, and reversing thetrend of rising public debt. So far the expansion of the monetary base has resulted in, what isfor Japan over recent times, positive economic growth with GDP expanding by 1.5 per cent

in 2013. A reduction in Japans trade deficit, which occurred as a positive effect of a weakerYen on exports was more than offset by the rising cost of imports (driven in large part by fuel

imports).

The decision to progressively restart nuclear capacity as part of the new Basic Energy Planwill enable Japan to progressively reduce its energy imports and relieve some of the pressure

on the trade deficit although the pace of the restart may build cautiously in line with publicnervousness around nuclear power. While unpopular with parts of the community, Japan has

few energy options in the short term to meet both its economic growth and carbon emissionreduction targets.

Growth in 2014 is assumed to moderate to 1.1 per cent as the effect of the fiscal stimulus ispartially offset by the economic drag from an increase to the consumption tax in April 2013

However, there are ongoing concerns that continued deterioration of the current account willforce Japan to draw on its domestic savings, increasing the need to manage its large public

debt.

In the longer run Japans economic growth is expected to marginally strengthen to around 2

per cent a year. However, limited public detail surrounding the Governments plans for muchneeded fiscal and structural reforms are contributing to uncertainty about how seriously theywill be implemented and their ultimate effect on economic growth.

Japans longer term growth strategy remains focused on raising investment and employment

and increasing productivity. However its ability to boost growth rates beyond currentprojections will continue to be constrained by an ageing labour force and the need for fiscal

consolidation. There are also some risks for Japanese industry of slowing demand in key exportmarkets, particularly China, which would be compounded if domestic demand was also to fall

back to pre-Abe levels.


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South Korea

The South Korean assumed is projected to expand steadily through the outlook period rising

from 2.8 per cent in 2013 to 3.5 per cent in 2014. The South Korean economy remains heavily

reliant on exports, particularly consumer electronics, heavy engineering, ship-building andcars with China now being its largest market. However, increasing competition from Japan andChina, as well as growing support in China for domestically produced goods, will challenge

South Koreas share in these markets.

Government plans to stimulate growth in services sectors such as education, finance, softwareand tourism offer the prospect of a more diversified economy with additional sources of

activity supporting a longer term average growth rate of 3.5 per cent a year from 2015onwards.

The EU

The tentative economic recovery in Europe over the second half of 2013 increasingly appearsto be strengthening; ensuring that the region retreats further from the possibility of sustained

flat or negative growth. Overall the EU is expected to grow by 1.0 per cent in 2014, up froma stagnant 0.1 per cent in 2013. These positive assumptions are based on the expected faster

recovery of the three main EU economies of the United Kingdom which is projected to growby around 2.2 per cent in 2014, Germany which is expected to rebound up from 0.4 per cent in

2013 to 1.7 per cent in 2014 and France which will increase by 0.5 percentage points from 2013to 0.8 per cent in 2014.

Nevertheless, economic growth in several key economies, such as Italy and Spain, still lagswith continuing austerity and public debt issues that continue to weigh down the overallperformance of the region. However, the prospect of a possible return to recession in theseeconomies is more remote than even four months ago.

Over the outlook period, EU GDP growth is assumed to recover to 2.0 per cent in 2019, based

on the expectation that fiscal reforms continue across the region. Exports from the EU areexpected to pick up in line with an improvement in the world economy; however uncertainty

over the management of internal challenges, particularly debt and fiscal policy, is assumed tomoderate the prospects for higher economic growth over the next five years.


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Figure 2: Economic growth in select economies

1

2

3

4

5

6

7

8

China Japan South Korea India US

2013 2015 2017 2019

%

Sources: IMF; BREE

Economic outlook for Australia

According to the Australian Bureau of Statistics, Australias GDP increased 0.7 per cent in theDecember quarter 2013, a modest increase from the 0.6 per cent increase in the Septemberquarter. An increase in net exports, particularly resources commodities, and consumption

expenditure were partially offset by lower gross fixed capital formation in the Decemberquarter. For the full year 201314, Australias GDP growth is assumed at 2.8 per cent with

low domestic interest rates expected to continue to stimulate housing construction andconsumption expenditure. Higher resources and energy commodity export earnings as a

result of both higher volumes and a more favourable Australian dollar exchange rate will alsosupport GDP growth in 201314.

Over the outlook period to 201819, Australias GDP growth rate is assumed to decline over the

next two years, before recovering to trend growth in 201819. Capital expenditure, particularlyin the mining and energy sectors, has been an important driver of economic growth in

Australia since the GFC. While there are still several large resource and energy projects beingdeveloped in Australia, many of these are scheduled for completion over the next 18 months.

The resulting decrease in construction activity, lower capital expenditure and its flow oneffect on employment, will limit Australias economic growth in the short term. Forecastrobust residential building activity in response to ongoing low interest rates, higher exports

and increased infrastructure spending are expected to partially of fset the decline in capitalexpenditure over the next two years. Unemployment will be a key risk in the short to medium

term. Continued structural change in the Australian economy and the transition from themining construction phase to the production phase has the potential to place sustained

pressure on employment growth. In 201415, Australias GDP growth rate is assumedto decrease to 2.5 per cent but lower growth levels are possible in the event of higher

unemployment rates.


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Over the medium term, growing resources and energy commodity exports and sustained highlevels of residential construction activity are expected to support GDP growth rates returning

to the long term trend level of around 3 per cent in 201819 (see Table 2).

Table 2: Key macroeconomic assumptions for Australia

unit 201213 201314 a 201415 a 201516 a 201617 a 201718 a 201819 a

Economic growth bc % 2.6 2.8 2.5 2.6 2.7 2.8 3.0

Inflation rate b % 2.4 2.7 2.6 2.5 2.2 2.2 2.2

Interest rate d % 3.1 2.5 2.5 2.8 3.0 3.5 4.0

Exchange rate e US$/A$ 1.03 0.90 0.86 0.85 0.85 0.85 0.85

a BREE assumption. b Change from previous period. c Seasonally adjusted chain volume measures. d Median RBA cash rate.e Average of daily rates.Sources: BREE; ABS; RBA.

Although lower than the first quarter of 2013, the Australian dollar-US dollar exchange rateremains high by historical standards. Since depreciating in the second half of 2013, the

Australian dollar-US dollar exchange rate has remained relatively stable through the firstquarter of 2014 and traded at around 0.89 USD/AUD for most of the quarter. Through the

remainder of 2014 the exchange rate is forecast decline in response to further tapering of theUS QE3 bond purchases, lower commodity prices (and subsequently declining terms of trade)

and more bearish sentiment over economic growth in China. For the financial year 201314 theexchange rate is forecast to average 0.90 USD and then depreciate to average around 0.85 USD

over the remainder of the outlook period.

Australias resource and energy commodities, production and exports

Australian producers of resource and energy commodities have been facing increasing

commercial pressure due to the recent declines in world commodity prices. However,commodity prices have generally not been declining in response to decreasing demand. In

fact, consumption of resource and energy commodities has been increasing in most cases,often at quite robust rates. The decline in commodity prices can more accurately be attributed

to the strong growth in world supply that is the product of substantial global investmentin commodity production capacity since the GFC. Most commodity markets are now well

supplied and in the case of refined materials, notably aluminium, there is a global surplus of

production capacity as a result of the substantial expansion of Chinas domestic industry. Theresulting supply glut has caused most commodity prices to retreat already in the past 1218months, with a further falls forecast in most cases.


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For Australia, the period of falling commodity prices presents a considerable, but notinsurmountable challenge. The emergence of new low cost competitors over the past

decade and cost pressures in Australia has pushed many Australian producers to the wrongend of world cost curves. In the coming period of lower prices, cutting costs and enhancing

productivity will be paramount to the continued success of Australias resource and energyproducers. Cost structures are rarely stable and evidence from the corporate reports of a

number of operators released in early 2014 indicate cost cutting activities have already beenhighly successful and many still expect further reductions in 2014. While cost cutting is

generally associated with employment reductions, mining sector employment increased 2.6per cent quarter-on-quarter in December following a 3.4 per cent increase in the September

quarter (see Figure 3). While the downturn in mining capital expenditure will likely resultin fewer construction jobs, the shift to the production phase of the mining boom stillholds substantial benefits for Australia, both in terms of revenue growth and employment

opportunities.

Figure 3: Quarterly Australian mining sector employment

50

100

150

200

250

300

2003 2005 2007 2009 2011 2013

000

people

Source: ABS.

In 201314, total export earnings for resources and energy commodities are forecast to increase

13 per cent, supported by robust growth in both resources and energy commodity exportvolumes and a lower Australian dollar exchange rate. Resources commodity export earnings

are forecast to increase 17 per cent to total $125 billion, mainly due to substantial growth in thevolume of iron ore exports. Export earnings from energy commodities are forecast to increase7 per cent to total $74 billion, underpinned by higher earnings for LNG as well as thermal and

metallurgical coal.


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The outlook for Australias resources and energy exports remains positive. Although prices formost commodities are expected to moderate over the outlook period, the projected growth

in export volumes of Australias key commodities will support growth in export earnings.However, in real terms, export earnings from resources commodities are projected to peak in

201617 and energy commodity exports will become the principal driver of export earnings.In nominal terms, the value of LNG exports is projected to increase around 340 per cent over

the outlook period as the large investments in new facilities over the past three years startproduction. Total export earnings are projected to increase at an average annual rate of 8 per

cent to total $284 billion in 201819. Resources and energy export earnings are projected tototal $151 billion and $133 billion in 201819, respectively (see Figure 4).

Figure 4: Australias resources and energy export earnings

40

80

120

160

199091 199495 199899 200203 200607 201011 201415 201819

energy resources

201314A$b

Sources: BREE; ABS.

Table 3: Australias resources and energy commodity exports, by selected commodities

unit 201213 201819 z CAGR unit 201213 201819 z CAGR

Alumina kt 18 914 16 908 1.9 A$m 5 342 7 265 5.3

Aluminium kt 1 569 1 397 1.9 A$m 3 276 3 690 2.0

Copper kt 976 1 242 4.1 A$m 8 044 14 326 10.1

Gold t 280 303 1.3 A$m 15 056 16 415 1.5

Iron ore Mt 527 847 8.2 A$m 57 075 87 724 7.4

Nickel kt 253 219 2.4 A$m 3 642 4 051 1.8

Zinc kt 1 591 1 767 1.8 A$m 2 193 3 839 9.8

LNG Mt 24 79 22.1 A$m 13 741 60 414 28.0

Metallurgical coal Mt 154 193 3.8 A$m 22 434 31 334 5.7

Thermal coal Mt 182 244 5.1 A$m 16 169 23 790 6.6

Oil kbd 323 286 2.0 A$m 12 503 12 811 0.4

Uranium t 8 391 8 890 1.0 A$m 823 1 237 7.0

Volume Value

f BREE forecast. CAGR is compound annual growth rate, in percentage terms.Sources: BREE; ABS.


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Table 4: Medium term outlook for Australias resources and energy commoditiesunit 201213 201314 f 201415 f 201516 z 201617 z 201718 z 201819 z

Value of exports

Resources and energy A$m 176 053 199 400 215 311 237 766 262 824 278 825 284 422

real b A$m 180 600 199 400 210 504 226 706 244 936 254 255 253 774Energy A$m 69 058 73 943 79 689 98 807 116 569 130 903 133 592

real b A$m 70 841 73 943 77 910 94 211 108 635 119 367 119 197

Resources A$m 106 996 125 457 135 621 138 959 146 255 147 923 150 830

real b A$m 109 759 125 457 132 594 132 495 136 301 134 887 134 577

Mine production

Gross value A$m 169 011 191 424 206 698 228 255 252 311 267 672 273 045

real b A$m 173 376 191 424 202 084 217 638 235 138 244 084 243 623

b In current financial year Australian dollars. f BREE forecast. z BREE projection.Sources: BREE; ABS.

Australia's major resources and energy commodity exports

201314 f

volume EUV value

p p p

20% 12% 35%

p q p

15% 10% 4%

p q p

8% 2% 5%

q p p

1% 19% 17%

q p p

6% 12% 6%

q q q

1% 12% 13%

p p p

3% 2% 5%

q p p

4% 10% 5%

q l q

1% 0% 1%

q q q

13% 9% 21%

p p p

2% 14% 16%

p q p

6% 4% 1%Lead

Iron ore and pellets

Metallurgical coal

Thermal coal

LNG

Crude oil

Gold

Copper

Alumina

Aluminium

Nickel

Zinc

f BREE forecast.EUV is export unit value

A$1.9b

A$2.2b

A$3.6b

A$3.3b

A$5.3b

A$8.0b

A$15.1b

A$12.5b

A$13.7b

A$16.2b

A$22.4b

A$57.1b

A$2.0b

A$2.5b

A$2.9b

A$3.2b

A$5.6b

A$8.4b

A$13.1b

A$13.2b

A$16.1b

A$17.1b

A$23.3b

A$76.8b

15 30 45 60 75 90

A$b

201314 f 201213


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Energy outlook

OilPam Pham

Prices

After a period of high prices in the September quarter 2013 relative to the June quarter,oil prices fell in the December quarter in response to increased production and easing of

international sanctions imposed on Irans oil exports. For 2013 as a whole, the West Texas

Intermediate (WTI) price averaged around US$98 a barrel while the Brent price averagedaround US$109 a barrel. Prices are expected to stay at similar levels in 2014 amidst concernsabout growing tension between Russia and Ukraine, and ongoing conflict over oil wealth in

Libya.

Prices are forecast to moderate in the medium term, supported by higher output from the US,Brazil, Saudi Arabia and Iraq, and a continued decline in oil consumption in OECD economies.

The WTIBrent price dif ferential is also expected to widen due to robust growth in USproduction and continued political instability in the Middle East. World oil prices are projected

to decline steadily, with real WTI prices expected to fall to US$83 a barrel and real Brent pricesUS$95 a barrel in 2019 (see Figure 1).

Figure 1: Annual WTI and Brent oil prices

20

40

60

80

100

120

140

1999 2003 2007 2011 2015 2019

Brent WTI

2014US$/bbl

Sources: BREE; EIA.


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Oil prices are subject to considerable volatility over the medium term due to changes ineconomic and political conditions. Geopolitical tensions and unexpected supply disruptions

may put upward pressures on oil prices. Conversely, weaker-than-assumed world economicgrowth may put downward pressures on oil prices over the outlook period.

World oil consumption

Recent growth in world oil consumption has largely been driven by consumption growth

in non-OECD economies which offset lower consumption in the OECD. In 2013, world oilconsumption was about 91 million barrels a day, up by 1.8 per cent relative to 2012. This

was underpinned by strong demand in non-OECD Asia and the Middle East. Meanwhile, oilconsumption in the OECD has been declining in response to weak economic growth and

improved fuel efficiency in the transport sector. This trend is expected to persist over theprojection period.

In 2014, world oil consumption is forecast to increase by 1.8 per cent to 92.6 million barrels a

day. Strong growth in oil consumption in Asia and the Middle East is expected to contribute tonon-OECD consumption exceeding OECD consumption for the first time. The gap is expected

to widen over the projection period (see Figure 2). Over the period 2015 to 2019, world oilconsumption is projected to grow by 1.3 per cent a year to 98.7 million barrels a day in 2019.

Figure 2: Oil consumption in OECD and non-OECD economies

10

20

30

40

50

60

2003 2007 2011 2015 2019

OECD Non-OECD

mbd

Sources: BREE; IEA.


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Oil consumption in non-OECD countries

In 2013, oil consumption in non-OECD economies averaged 45.2 million barrels a day.

Increasing numbers of automobile users in non-OECD Asia and the development of new

oil-fuelled electricity generation capacity in the Middle East will be significant sources ofdemand growth for oil in the medium term. In 2014, oil consumption in non-OECD economiesis forecast to increase by 3.1 per cent to average 46.6 million barrels a day. Between 2015 and

2019, oil consumption in non-OECD economies is projected to increase by 2.9 per cent a yearto average 53.8 million barrels a day in 2019.

China is projected to lead the growth in non-OECD oil consumption, followed by India. Chinas

growing vehicle ownership as household income increases will drive oil consumption growth.Partially offsetting this growth will be the government target to improve fuel efficiency by 38

per cent by 2015. The adoption of commercial liquefied natural gas (LNG) trucks could alsodampen growth in Chinas oil demand over the medium term. In 2014, Chinas oil consumption

is forecast to increase by 3.8 per cent to average 10.5 million barrels a day. Over the period20152019, Chinas oil consumption is projected to increase by 3.7 per cent a year to average12.6 million barrels a day in 2019.

In India, oil consumption is forecast to average 3.5 million barrels a day in 2014, increasing by

3.2 per cent relative to 2013. Growing vehicle ownership will outweigh the negative impact ofdiesel price deregulation on oil demand. Indias oil consumption is expected to continue to

grow robustly over the medium term, by 3.2 per cent a year to 4.1 million barrels a day in 2019.

Additional demand for oil for electricity generation in the Middle East will further support

growth in non-OECD oil consumption in the short to medium term. In 2014, oil consumptionin the Middle East is forecast to increase by 3.3 per cent to average 8.1 million barrels a dayas new oil-fuelled electricity generation capacity comes online. Between 2015 and 2019, oil

consumption is projected to grow by 3.2 per cent a year to 9.5 million barrels a day in 2019. Thepromotion of more efficient use of electricity and alternative power generation sources may

result in oil consumption being lower than forecast.

Oil consumption in OECD economies

In 2013, oil demand in OECD economies remained at its 2012 level of around 46 million barrels

a day. From 2014 onwards, oil demand is projected to fall steadily to 44.9 million barrels a day in2019, underpinned by projected lower demand from Europe, North America and Japan.

Weak economic growth, continued improvement in fuel efficiency in the transport sector and

reduced use in electricity generation and heating applications have contributed to an ongoingdecline in oil consumption in OECD-Europe. This trend is expected to continue over the

medium term. In 2014, oil consumption in OECD-Europe is forecast to decrease by 0.7 per centto average 13.6 million barrels a day. Over the outlook period, oil consumption in OECD-Europe

is projected to decline by 0.7 per cent a year to 13.1 million barrels a day in 2019.


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Oil consumption in North America is forecast to average 24.1 million barrels a day in 2014 and isprojected to remain relatively stable at around 24 million barrels a day throughout the outlook

period. The effect of energy eff iciency policies and fuel substitution due to high sustainedoil prices will underpin a marginal decrease in the USs oil consumption during 20152019 to

average 19.5 million barrels a day in 2019.

Lower oil consumption in Japans power generation sector will also contribute to the fall inOECD oil consumption. In 2014, Japans oil consumption is forecast to decrease by 1.8 per cent

to average 4.5 million barrels a day. An assumed gradual restart of nuclear power generationcapacity will contribute to lower oil consumption over the projection period. Japans oil

consumption is projected to fall by 0.9 per cent a year to 4.3 million barrels a day in 2019.

World oil production

In 2013, non-OPEC oil production increased, underpinned by higher unconventional oilproduction in the US and Canada and deep-water production in Brazil. Increased supply from

OPEC countries will support further growth in world oil production in 2014, with Iraq expectedto expand its production capacity and the prospect of production rebounding in Iran. In 2014,

world oil production is forecast to increase by 2.4 per cent to average 93.6 million barrels a day(see Figure 3).

Figure 3: World oil production in OPEC and non-OPEC economies

20

40

60

80

100

120

2003 2007 2011 2015 2019

OPEC crude oil OPEC natural gas liquids non-OPEC

mbd

Sources: BREE; IEA.

Over the outlook period, world oil production is projected to increase by 1.1 per cent a yearto average 98.8 million barrels a day in 2019, largely supported by projected increases in

unconventional oil production in North America.


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Non-OPEC oil production

Unconventional supplies from North America, in particular US light tight oil and Canadian oil

sands, have largely driven the recent growth in non-OPEC oil production, and are expected to

continue to expand. The development of deep-water production in Brazil will also contributeto non-OPEC production growth in the medium term.

Production from the Kashagan field in Kazakhstanthe largest field outside of the MiddleEastis not expected to be a major contributor to non-OPEC production growth over the

outlook period. The f ield was closed due to safety concerns after just a month in operation. Aproduction restart date remains unknown. Assuming that the field comes back online during

the outlook period, continued technical challenges and cost overruns will likely constrain itsproduction in the medium term.

In 2014 non-OPEC oil production is forecast to increase by 2.6 per cent to average 56.2 million

barrels a day. Over the period 20152019, non-OPEC production is projected to increase by 1.4per cent to average 60.3 million barrels a day in 2019.

Unconventional oil production in the US and Canada will continue to grow. Commerciallyviable technologies associated with unconventional oil and gas extraction have driven US oil

production growth. Improving drilling efficiencies, optimising fracking and reducing unit costswill continue to support US oil production in the medium term. In 2014, US oil production is

forecast to average 10.9 million barrels a day, increasing by 5.8 per cent relative to 2013. In themedium term, US oil production growth is likely to moderate as demand weakens. Between

2015 and 2019, US oil production is projected to grow by 2.8 per cent a year to average 12.5

million barrels a day in 2019.

Continued development of oil sands projects coupled with increased domestic and foreign

investment in the petroleum sector will contribute to expanded oil production in Canada,although pipeline capacity may limit the pace of growth. In 2014, Canadas oil production is

forecast to increase by 2 per cent to average 4.1 million barrels a day. Over the period 20152019, Canadas oil production is projected to grow at a rate of 4.5 per cent a year to average 5.1

million barrels a day in 2019.

Outside North America, Brazil is projected to be the fastest-growing non-OPEC oil producer. In2014, Brazils oil production is forecast to increase by 8.6 per cent, to average 2.3 million barrels

a day, underpinned by increased deep-water production. The expansion of production at anumber of offshore oil fields will continue to drive Brazils oil production over the medium

term. Between 2015 and 2019, Brazils oil production is projected to grow by 6.8 per cent a yearto average 3.2 million barrels a day in 2019.

Partially offsetting non-OPEC oil production growth over the medium term will be a moderate

decline in production in Europe and the Pacific due to lower production from maturing fields.


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Australias production and exports

In December 2013, oil production resumed at the Vincent and Pyrenees fields after temporarilyclosed for maintenance. Production at the Montara-Skua project in the Bonaparte basin and

the Fletcher-Finucane project in the Carnarvon basin together added about 65 000 barrels aday to Australias oil production in the second half of 2013. These underpin a forecast 2.2 per

cent increase in Australias crude oil and condensate production to average 374 000 barrels aday in 201314 (see Figure 4). An expected commencement of the Coniston project (estimated

capacity of 22 000 barrels a day) in the Carnarvon basin in the first half of 2014 will also supportthe production increase. The Surprise oil field in the Northern Territoryexpected to be fully

operational by mid-March 2014 with a capacity of 400 barrels a daywill also contribute to theexpansion of Australias oil production in 201314.

Figure 4: Australian crude oil, condensate and LPG production

100

200

300

400

500

600

700

800

199899 200203 200607 201011 201415 201819

Crude oil Condensate LPG

kbd

Source: BREE.

In 201415 and 201516 Australias oil production is projected to fall as lower production atmature fields more than offset increases in new production capacity. In 201617 and 201718,

production is expected to rebound, supported by additional condensate and liquefiedpetroleum gas production from the two gas projects in the Browse basin. Ichthys and Preludethat are expected to commence during 2017. However, the new production capacity will not

be enough to offset the decline in oil production in the medium term. In 201819 Australias oilproduction is projected to average 354 000 barrels a day, its lowest level since 1972.


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The closure of Caltexs Kurnell refinery (capacity of 135 000 barrels a day) in the second half of2014 will adversely affect Australias refinery production over the outlook period. In 201314

refinery production is forecast to fall by 6.9 per cent to average 592 000 barrels a day. Refineryproduction is projected to decline further by 3.5 per cent in 201415. Over the period 201619,

Australias refinery production is projected to remain at around 575 000 barrels a day.

Australias crude oil and condensate exports are forecast to fall by 5.6 per cent to 305 000barrels a day in 201314 (see Figure 5). Despite this, higher prices and an assumed depreciation

of the Australian dollar result in the export value increasing by 5.8 per cent to $13.2 billion.

Over the projection period 201415 to 201819, Australias crude oil and condensate exportsearnings are projected to decline by 2.9 per cent a year to $11.4 billion (in 201314 dollars) in

201819 given the projected lower export volumes and prices.

Figure 5: Australian crude oil and condensate exports

3

6

9

12

15

100

200

300

400

500

199899 200203 200607 201011 201415 201819

volume value (right axis)

kbd201314A$b

Sources: BREE; ABS.


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Table 1: Oil outlook

unit 2013 2014 f 2015 f 2016 z 2017 z 2018 z 2019 z

World

Production b Mbd 91.4 93.6 95.1 96.3 97.3 98.1 98.8

Consumption b Mbd 91.0 92.6 93.9 95.1 96.4 97.4 98.7

WTI crude oil price

nominal US$/bbl 97.9 98.4 94.9 93.8 92.9 92.2 92.0

real c US$/bbl 99.6 98.4 93.0 90.1 87.5 85.2 83.3

Brent crude oil price

nominal US$/bbl 108.7 108.5 107.7 106.4 105.4 104.8 104.7

real c US$/bbl 110.6 108.5 105.5 102.3 99.3 96.8 94.9

201213 201314 f 201415 f 201516 z 201617 z 201718 z 201819 z

Australia

Crude oil and condensate

Production b kbd 366 374 366 339 358 372 354

Export volume b kbd 323 305 322 302 301 300 286

nominal value A$m 12 503 13 231 14 541 13 650 13 542 13 450 12 811

real value d A$m 12 826 13 231 14 216 13 015 12 620 12 265 11 431

Imports b kbd 516 510 512 523 502 486 491

LPG

Production be kbd 61 61 60 55 59 61 58

Export volume b kbd 41 40 40 37 39 40 38

nominal value A$m 1 088 1 192 1 308 1 208 1 273 1 317 1 252

real value d A$m 1 116 1 192 1 279 1 152 1 186 1 201 1 117

Petroleum products

Refinery production b kbd 636 592 571 575 575 574 575

Exports bg kbd 16 13 14 14 14 14 14

Imports b kbd 408 443 496 513 540 568 591

Consumption bh kbd 945 969 994 1 017 1 040 1 064 1 090

b Number of days in a year is assumed to be exactly 365. A barrel of oil equals 158.987 litres. c In current calendar year US dollars. d Incurrent financial year Australian dollars. e Primary products sold as LPG. g Excludes LPG. h Domestic sales of marketable products.f BREE forecast. z BREE projection.Sources: BREE; ABS; IEA; Energy Information Administration (US Department of Energy); Geoscience Australia.


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Gas

Tom Willcock and David Whitelaw

Prices

Asian LNG prices

Delivered LNG prices into North Asia were higher through the December quarter, mainly

due to increased seasonal demand. Average Japanese LNG import prices increased steadilythrough the quarter to reach US$16.8 a gigajoule at the end of the year. South Korean prices

were relatively flat, around US$15.4 a gigajoule, while Chinese prices rose strongly in Decemberto reach US$14.6 a gigajoule. Higher realised prices largely reflect increased spot market

purchases due to higher demand (above contracted volumes) and continued strong oil prices(to which most Asian LNG contracts are linked). The Japanese Crude Cocktail, for example,

hovered around US$112113 through the December quarter, well above prices in the US$105range witnessed mid-year.

Implied LNG values from Pluto were much higher in the December quarter (from US$7.4 a

gigajoule in September to US$10.8 a gigajoule in December) largely because of contractadjustments (including bonus payments). The implied LNG prices received at the North West

Shelf (NWS) project were flat (at US$12.6 a gigajoule, the same as September) due to lower spotmarket sales.

Domestic prices

Domestic gas prices were generally subdued over the December quarter. In the Easternmarket, prices in the Adelaide, Brisbane and Sydney Short Term Trading Markets (STTMs)

and Victorian wholesale market were largely unchanged. Relatively mild weather subduedelectricity and hence gas demand (with little gas bought at spot prices) in those markets.

Prices rose strongly in January at the Adelaide STTM, due to higher gas demand for electricitygeneration during a record heatwave. In the Western market, Woodsides implied price fordomestic sales gas was considerably higher in the December quarter ($5.0 a gigajoule) than in

September ($4.2 a gigajoule), due to the completion of relatively low-priced industrial contract.Apaches average realised price was relatively flat at $4.7 a gigajoule in December ($4.6 a

gigajoule in September).


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Outlook

Looking forward, Australian domestic prices and Asian LNG prices are expected to converge

to some degree, particularly on the East coast. Australian gas prices face considerable upward

pressure over the medium term, and are widely expected to increase due to both demandcompetition (from LNG projects) and higher production costs. Netback pricing, in particular,will be a key determinant of future prices in the Eastern market. A number of new contracts,

slated to start in coming years, were announced in the December quarter (including byOrigin, AGL, and Strike). Prices have been quoted around $7 to $9 a gigajoule and comprise

an oil-linked component (creating a gas price response as the oil price rises and falls). Prices inthe Eastern market have historically been $4 a gigajoule or lower and been linked to an annual

price escalator such as the CPI.

In the Asian LNG market, the tight supply conditions prevailing in 2013 will be replaced byexcess supply conditions later this decade (see Figure 2 in the following section). This is

likely to place significant downward pressure on spot prices (currently at record highs in theorder of $20 a gigajoule). By 2019, spot prices are likely to fall well below the high oil-linkedcontract prices expected to prevail in that market and should increasingly reflect the marginal

producers cost of production.

Global outlook

Production and consumption

Global gas consumption is projected to grow by 12 per cent over the forecast period 2013to 2019 to around 3930 billion cubic metres. The main regions of growth will be in Asia

(predominantly China and India), followed by Africa and the Middle East. Coincident with thistrend in consumption will be a shift in gas production, with a decline in European production

more than offset by significant growth in Australia. Gas production in North America, growingrapidly from shale gas sources, is expected to result in the continent becoming a net exporter

towards the end of this decade. These developments represent a significant shift to the east ingas demand, and are likely to lead to some major re-alignments in world gas trade f lows.

Recent global LNG movements have been relatively subdued, hovering around 235 million

tonnes in 2011, 2012 and 2013. This is due mainly to prevailing tight supply conditions as aresult of lower production and liquefaction capacity in Africa and Indonesia. These tight

conditions will persist until at least 2015 when new capacity will be commissioned in Australia,followed by projects in other countries in the Asia-Pacific, the US, Canada, Russia, and Africa. It

is expected that booming supply will release the pent-up demand for LNG imports, leading torapid growth in LNG trade over the remainder of the outlook period from 2015. By 2019, global

LNG demand is forecast to have expanded by almost 50 per cent, to reach 350 million tonnes(see Figure 1).


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Figure 1: Global LNG trade

100

200

300

400

2013 2015 2017 2019

Japan South Korea China Rest of Asia Europe Rest of World

Mt

Note: Rest of Asia includes domestic LNG f lows within Indonesia and Malaysia.

Source: BREE.

Figure 2 shows the forecast installed liquefaction capacity and LNG imports over the period2013 to 2019. The major increases in capacity come from Australia after 2015, followed bythe US and Canada and then Russia. In the US, the Sabine Pass project is currently under

construction and another five plants have received non-FTA export approval from theUS Government (a key gateway to making a final investment decision and beginning

construction). The extent and speed of US developments will reshape global LNG trade (theUS was a sizable LNG importer as recently as 2011). While consumption increases rapidly over

the outlook period, it is vastly outweighed by the forecast increase in LNG supply, resulting in asignificantly less tight global market by 2019.

Figure 2: Global installed liquefaction capacity and LNG imports

100

200

300

400

500

2013 2015 2017 2019

Rest of World Australia North America Africa LNG consumption

Mt

Note: Capacity projections allow for downtime and maintenance.

Source: BREE.


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Figure 3 shows existing and under construction liquefaction capacity. Overwhelmingly, thoseprojects are located in Australia and will result in Australian liquefaction capacity more than

tripling to become the largest in the world towards the end of the decade.

Figure 3: Global nameplate liquefaction capacity, as of March 2014

20

40

60

80

100

Australia Qatar Africa Indonesia Malaysia OtherAsiaPacific

OtherMiddleEast

Europe LatinAmerica

NorthAmerica

Existing Under Construction

Mtpa

Note: Includes capacity at projects that are not currently operating for various reasons (such as ELNG in Egypt).

Source:BREE and LNG Insight.

Regional LNG trade

Japan

Japan is currently the worlds largest LNG importer and is expected to remain so over themedium term. Large gas reserves in the East China Sea are unlikely to be developed until the

territorial dispute with China is resolved, and proposals to develop methane hydrates off thewest coast are high cost and are at best a long term option.

In 2012, approximately two thirds of gas use was for power generation, a significant rise sincethe Fukushima incident in 2011 when the Japanese nuclear fleet was progressively closed.

The prospects for increased LNG imports will be critically dependent on the fuel-sourcing

strategies of the electricity generation industry in Japan over the coming decade (see thereview section for further discussion of Japanese energy policy).


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Japanese gas imports are projected to decline slightly over the outlook period, to 86 milliontonnes in 2019, as a result of on-going energy efficiency measures and government reforms. If,

as expected, the government permits between 12 and 20 nuclear reactors to restart over thenext two years, the impact is likely to be predominantly on oil consumption currently used in

power generation rather than on gas consumption.

Figure 4 shows projected Japanese LNG demand by supplier. The LNG import mix is currentlydominated by Middle Eastern supply but this is expected to shift towards Australia, with

significant growth in North American supply late in the outlook period. Japanese companiesare diversifying supply sources and investing in overseas gas production in Australia, Indonesia,

North America and Russia.

Figure 4: Japanese LNG imports outlook by supplier

20

40

60

80

100

2013 2015 2017 2019Australia ASEAN Middle East North America Other

Mt

Source: BREE.

There is lit tle potential upside to this forecast, but a significant downside. Japan is currently

paying a high price for oil and gas-fired power generation and restarting the majority of thenuclear fleet (i.e. around 40 or more reactors) would likely lead to a more sustainable longterm solution for the country. This would result in a significant reduction in LNG imports and

particularly spot market purchases.


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South Korea

South Korea produces negligible gas domestically and is a major LNG importer. Around 22 per

cent of power generation in 2012 was gas-fired, with the remainder sourced mainly from coal

and nuclear power. However, South Korea is likely to expand nuclear power and renewablepower generation, so there are limited growth prospects for further penetration of gas in theelectricity generation sector.

Gas consumption more than doubled between 2001 and 2011 and currently supplies the

reticulated gas market and the power generation sectors in roughly equal proportions. Gasconsumption spiked in 2013 due to the shutdown of a number of nuclear reactors for safety

reasons. These reactors are expected to re-start by 2015, lowering gas consumption in thatyear, before moderate growth (supported by a recently announced reduction in the LNG

import tax) sees imports return to around 39 million tonnes by 2019. With limited reserves,and no prospects of pipeline imports in the medium term, this consumption must be met

with LNG imports. As Figure 5 shows, the majority of imports currently come from Indonesia,Malaysia and the Middle East, but it is expected that ASEAN imports will begin to be replacedby Australia and North America by 2017 and thereafter.

Figure 5: South Korean LNG import outlook by supplier

10

20

30

40

50

2013 2015 2017 2019

Australia ASEAN Middle East North America Other

Mt

Source: BREE.


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China

China has a rapidly growing natural gas market that mainly serves the industrial sector. Gas

consumption grew at 20 per cent a year between 2005 and 2013, and is expected to continue

growing at a high rate, reaching around 287 billion cubic metres by 2019. This is largely drivenby increasing gas use in power generation, although gas-powered vehicles also represent agrowing market segment.

China has large indigenous gas reserves which will support but not meet growing demand. By

2019, domestic production is projected to constitute only 55 per cent of consumption, from 75per cent in 2012. The gap is filled by a combination of pipeline and LNG imports. The balance

between these two import sources fluctuates as new pipeline and LNG contracts are broughtonline, but it is expected that there will be roughly equal imports from both sources over the

outlook period. There is considerable uncertainty relating to the prospects for Chinese shalegas production. If these resources are found to be uneconomic to develop, there will be a

significant long-term growth market for gas imports into China.

Pipeline imports are expected to grow dramatically as new supplies are connected from

Turkmenistan, Kazakhstan and Uzbekistan (via the Central Asia-China Pipeline) and later fromthe Russian Far East. These supplies will supplement existing pipeline volumes from Myanmar

and have huge potentialthe two largest gas fields in the world are located in Siberia andTurkmenistan. On current projections they will exceed LNG imports in the longer term.

However, this will depend on a number of geopolitical considerations, including Russian gaspricing policies and their incentives to pivot gas production eastwards and Chinese companies

willingness and ability to connect pipelines with gas-rich neighbouring countries.

Chinese LNG imports are projected to reach 51 million tonnes by 2019, primarily met by ASEANand Australian suppliers (see Figure 6). North America is not seen as a significant supplier to

China over the outlook period due to saturation of the Asian LNG market by 2019 and theabsence of contracted volumes.

Figure 6: Chinese LNG imports outlook by supplier

10

20

30

40

50

60

2013 2015 2017 2019

Australia ASEAN Middle East Other

Mt

Source: BREE.


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ASEAN

Total ASEAN LNG imports are projected to grow rapidly to about 18 million tonnes by 2019,

with most growth occurring in Indonesia and Malaysia (see Figure 7). Despite being large

gas producers, Indonesia and Malaysia have a mismatch between the location of demand(generally in the West) and the sources of supply (in the East). Combined with a rapidlygrowing domestic gas demand base, this is leading to the development of LNG receiving

terminals in parts of Malaysia and Indonesia while production is expanding in other areas (andtherefore resulting in domestically traded LNG). At the same time, gas production at existing

LNG export facilities is falling due to reserve depletion. The Arun liquefaction plant in Aceh hasbeen converted to a receiving terminal, and the large Bontang liquefaction plant in Borneo is

expected to cease exports by 2020.

Figure 7: ASEAN LNG import outlook by country

5

10

15

20

2013 2015 2017 2019

Philippines Vietnam Thailand Indonesia Malaysia

Mt

Note: Indonesia and Malaysia source a significant quantity of LNG domestically (i.e. domestically rather than

internationally traded LNG).

Source:BREE.

Indonesia, Malaysia and Brunei currently represent the second largest LNG exporting region inthe world after the Middle East and this transition to a more domestic focus will affect world

LNG trade. This tension between local needs and export priorities has led to the proposed

Donggi-Senori liquefaction plant in Sulawesi province being required to reserve one third ofproduction for local needs. This forecast assumes that production expands to meet domesticdemand growth but can only maintain a flat to declining export profile over the outlook

period.

The Philippines, Vietnam and Thailand will import small volumes starting in 2015 which areprojected to grow over the outlook period. Vietnam and Thailand both have significant

domestic production (Thailand also has access to pipeline imports) to meet strongly growingdemand, while the Philippines has to meet all gas consumption via LNG (due to small

indigenous reserves).


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Box 1: Floating LNG (FLNG)

Historically, LNG has been produced at large plants located in close proximity to gas resources and

a jetty capable of moving the liquefied gas to tankers for transport. For gas fields located of fshore,this involves building offshore facilities to extract the gas, pipelines to transport it back to the

land-based plant where it is liquefied and jetty infrastructure so it can be moved to ships for export.

From 2015, LNG will be produced for the first time using floating LNG technology. For offshore

fields, FLNG centralises the production process by co-locating the gas extraction, transport and

liquefaction facilities on-board one enormous vessel.

The worlds first two FLNG vessels are currently being built in South Korea. The first, Prelude, is

being constructed for Shell. Its hull is almost half a kilometre long, and when complete, it will weigh

around six times as much as an aircraft supercarrier. Capable of liquefying 3.6 million tonnes a year

of natural gas, it will be one of the largest structures ever put to water. The second, PFLNG, is being

constructed for Petronas. Slightly smaller than Prelude, it will be 365 metres long and be capable

of liquefying 1.2 million tonnes a year of natural gas. On completion in 2016, Prelude will be towed

from South Korea to the north west coast of Western Australia. It will then be moored in place

for 25 years as it extracts gas, liquids and condensate from fields in the Browse Basin. The PFLNG,

scheduled for completion in 2015, will operate in the Kanowit gas field off the coast of Malaysian

Borneo. Petronas also recently announced that it had reached a final investment decision (FID) on a

second FLNG which will begin construction soon (aiming for 2018 start-up).

FLNG has a number of benefits compared with traditional LNG plants. It avoids the environmental

impact associated with building an onshore plant and jetty and offshore platforms and pipelines.

For certain fields it is considered a cheaper option than building onshore (as shown by Woodsides

decision to pursue FLNG over onshore LNG for their Browse basin resources). The first-of-its-kind

Prelude project will cost $12.6 billion at $3.5 billion per million tonnes of liquefaction capacity.This is roughly equivalent to the per-unit cost of the conventional Pluto project ($15 billion at

$3.5 billion per million tonnes of liquefaction capacity). The opportunities for savings are also

considerable based on the repeatability of the design (i.e. future construction will be able to forego

a considerable portion of front-end engineering and design costs). Finally, FLNG allows stranded

gas fields (those that are too far offshore to be accessed currently) to be economically exploited.

While the underlying technology is well established, the scale creates uncertainty. As such, these

projects are seen as bellwethers for the technology and its application. If successful, it will allow LNG

plant construction to become a factory process rather than a series of individual one-off building

projects, and could contribute to a wave of FLNG construction and deployment.


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Australia

Annual and quarterly production

Production in the December quarter was around 15.6 billion cubic metres, slightly lower thanthe September quarter (16.1 billion cubic metres). Production at some fields, such as Thylacinein the Otway basin, Reindeer and Pluto in the Carnarvon basin, and APLNGs Queensland CSG

operations increased following improvements in operating time and higher demand. Theseincreases were more than offset by lower production elsewhere in Victoria (Gippsland JV, Yolla,

Casino and Minerva) and Western Australia (where the cessation of a large industrial contractwith NWS caused domestic production fall considerably).

Australia is forecast to produce 62 billion cubic metres of gas in 201314, similar to 201213

production (see Table 1). The only major source of new gas production in the past six months

was the Macedon gas processing plant in Western Australia which was largely of fset bydeclines in other fields (mentioned above). The Tuna-Turrum project in the Gippsland basin,scheduled for completion in early 2014, is expected to largely replace falling production at

ageing fields in the area.

Outlook

A number of large export projects underlie the massive projected growth in Australian gas

production over the remainder of the outlook period (201415 to 201819). The seven LNGprojects currently under construction in Australia will more than double gas production from

62 billion cubic metres in 201213 to 151 billion cubic metres in 201819.

Western market production is projected to increase to around 73 billion cubic metres by 201819, from around 39 million cubic metres in 201213. Gorgon and Wheatstone domestic and

LNG output is expected to contribute around 34 billion cubic metres of additional productiona year by 201819, the majority of production growth over the outlook period.

Northern market production is expected to remain stable until the Ichthys project

begins operation in the Browse basin in 201617 and Prelude FLNG in early 201718. Thecommissioning of these projects is expected to underlie an increase in Northern market

production from less than 1 billion cubic metres currently (Bayu-Undan production is excluded

as it is in the Joint Petroleum Development Area) to more than 17 billion cubic metres in201819.

Eastern market production is projected to increase almost threefold: from around 22 billion

cubic metres in 201213 to 61 billion cubic metres in 201819. This growth is associated almostentirely with Queensland LNG projects: Australia Pacific LNG (APLNG), Gladstone LNG (GLNG)

and Queensland Curtis LNG (QCLNG). Gas production for domestic use faces considerableuncertainties over the outlook period. A number of projects such as Gloucester, Narrabri, and

Ironbark may begin operation, but face environmental, economic and social hurdles. Easternmarket demand is likely to be subdued by higher prices regardless of whether new projects go

ahead or not.


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A key uncertainty over the projection period is the prospects for Arrow Energys LNG plant.Arrow, a joint venture between Shell and PetroChina, has sizable CSG resources of around 25

billion cubic metres. The company has been cautious in recent months about the prospects ofdeveloping their own LNG plant to draw on those resources (a FID was pushed back again in

January). Arrow currently produces around a billion cubic metres of gas a year for domestic usebut may consider selling into existing LNG projects in the future rather than developing their

own LNG facilities.

Table 1: Committed Australian LNG projects

Project Basin Ownership (%) Capacity

(Mtpa)

Estimated start-up

Australia Pacific

LNG (APLNG)

Surat-Bowen Origin (37.5%), ConocoPhillips

(37.5%) and Sinopec (25%)

9 T1 H2 2015

T2 H1 2016

Gladstone LNG

(GLNG)

Surat-Bowen Santos (30%), Petronas (27.5%),

Total (27.5%) and Kogas (15%)

7.8 T1 H1 2015

T2 H2 2015

Queensland Curtis

LNG (QCLNG)

Surat-Bowen BG (73.75%), CNOOC (25%) and

Tokyo Gas (1.25%)

8.5 T1 - H2 2014

T2 H2 2015

Gorgon Carnarvon Chevron (47.3%), ExxonMobil

(25%), Shell (25%), Osaka Gas

(1.25%), Tokyo Gas (1%) and

Chubu Electric (.417%)

15.6 T1 H1 2015

T2 H2 2015

T3 H1 2016

Wheatstone Carnarvon Chevron (64.14%), Apache (13%),

KUFPEC (7%), Shell (6.4%) and

Kyushu Electric (1.46%)

8.9 T1 H2 2016

T2 H1 2017

Ichthys Browse Inpex (66%), Total (30%), Tokyo

Gas (1.6%), Osaka Gas (1.2%)

Chubu Electr ic (0.7%) and Toho

Gas (0.4%)

8.4 T1 H1 2017

T2 H2 2017

Prelude Browse Shell (67.5%), Inpex (17.5%), Kogas

(10%) and CPC (5%)

3.6 T1 H2 2017

Sources: BREE, Company reports; LNG Insight.


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Annual and quarterly exportsAustralia is forecast to export 23.7 million tonnes of LNG in 201314, a slight decrease from2012-13. This is mainly due to lower volumes from NWS (around 15.8 million tonnes in 201213

down to 15.4 million tonnes in 2013-14).

LNG production in the December quarter was slightly lower than in September (from 6.1million tonnes to 6.0 million tonnes) due to lower Darwin (higher downtime) and NWS

(offshore maintenance and reliability improvements to a number of trains) production. Incontrast, Pluto reported its highest ever quarterly production following maintenance through

mid-2013.

Construction progress at new LNG projects continued well over the December quarter. Bythe end of 2013, the upstream phase of APLNG was reportedly 58 per cent complete and

downstream 62 per cent complete. The main pipeline connecting the two is close to beingfully completed. Due to begin production in 2015 (see Table 1), GLNG is more than 72 per

cent complete and announced a cooperation agreement with APLNG in late October tobuild connection points between their respective pipelines to allow gas swaps (expected

to minimise gas transport and operational costs). QCLNG is the most advanced of thethree Queensland projects at an estimated 75 per cent complete and is expected to begin

production in late 2014.

Box 2: Global gas market modelling

BREEs view of the Asia Pacific LNG market over the next five years has been informed by the use

of a world gas model. This model calculates all inter-country pipeline and LNG trades within aleast-cost framework, providing an integrated view of world gas supply and demand. The detailed

database includes the costs of production from all gas fields in the world, and the costs of pipeline

transportation, LNG liquefaction, shipping and regasification. The model also incorporates all

existing and announced gas trading contracts.

The model has provided more insights into the likely growth and sourcing of gas supplies in

Australias LNG trading partners, both from competing LNG suppliers and pipeline sources. It also

provides insights on the future liquidity of the global gas market and potential spot prices.

BREE has assumed a lower LNG spot price later this decade, reflecting a more liquid and competitive

Asian LNG market (due to strong growth in LNG and pipeline supply as discussed in the Global

Outlook section earlier). This has contributed to lower projected export values compared with the

September 2013 Resources and Energy Quarterly. The projected export volumes are also lower than

in September, due to revised start-up assumptions for some projects, which has also contributed to

the lower projected export value. The September REQ projected $67 billion worth of gas exports in

201718, which has been revised down to $61 billion in this REQ.


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LNG projects in the West and North also made good progress through late 2013 and early2014, but will be completed later than the three Eastern market projects. According to project

operator Chevron, Gorgon and Wheatstone are now around 78 and 30 per cent complete,respectively. Ichthys (targeting 47 per cent completion by the end of 2014) is also progressing

steadily and Preludes hull was completed in December, a key milestone (see Box 1 for morediscussion on Prelude).

Figure 8: Australian LNG export volume and values

10

20

30

40

50

60

15

30

45

60

75

90

200405 200607 200809 201011 201213 201415 201617 201819

volume value (right axis)

Mt201314A$b

Sources: BREE, ABS; World Bank.

OutlookExport volumes are expected to more than triple over the outlook period (Figure 8). The

seven projects under construction (Table 1) represent an additional 62 million tonnes ofexport capacity a year by 201819 and are expected to increase exports to 79 million tonnesby that year. While the majority of Australias gas will be traded under contract, the ability of

Australian LNG operators to extend or re-sign expiring contracts (particularly at NWS), sign newcontracts (particularly at Gorgon and QCLNG), or price their gas competitively in AsiaPacific

spot markets will be key determinants of export volumes later in the outlook period. FutureAsiaPacific LNG market conditions, which will have a significant bearing on those factors, are

explored in the review section of this edition of Resources and Energy Quarterly.

Australian LNG export values were $13.7 billion in 201213 and are forecast to continue growingin 201314, to $16.1 billion. The growth in values is almost entirely due to the depreciation of

the Australian dollar as volumes and unit prices have been relatively flat. Values are projectedto continue increasing from 201415 due to larger volumes, reaching $54 billion (in real terms)

in 201819. This is despite a forecast fall in the oil price and the likelihood of increased globalsupply driving down LNG spot prices later in the outlook period.


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Table 2: Gas outlook

unit 201213 201314 f 201415 f 201516 z 201617 z 201718 z 201819 z

Australia

Productionb

Bcm 62.0 62.3 69.6 98.2 124.3 146.6 151.3 Eastern market Bcm 22.4 21.6 26.4 43.3 54.6 58.8 60.6

Western market Bcm 39.0 40.1 42.5 54.3 66.9 72.6 73.4

Northern market c Bcm 0.7 0.7 0.7 0.7 2.8 15.1 17.2

LNG export volume d Mt 23.9 23.7 27.7 46.2 62.7 77.8 79.4

nominal value A$m 13 741 16 121 20 461 36 235 49 205 60 625 60 414

real value e A$m 14 096 16 121 20 004 34 550 45 856 55 283 53 904

b Production includes both sales gas and gas used in the production process (i.e. plant use). c All production associated with the Browsebasin is classified as Northern market due to the Ichthys project. d Volume includes gross Darwin LNG exports. e In current financial yearAustralian dollars. f BREE forecast. z BREE projection.Sources: BREE; ABS.


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Thermal coal

Kate Penney

Prices

Newcastle free on board spot prices for 6000 kilocalorie per kilogram (kcal/kg) coal averagedUS$84 a tonne in 2013. Prices were around US$91 dollars a tonne at the start of the year and

declined progressively to around US$77 a tonne by the end of September as new capacitydeveloped over the past few years began production. Prices rallied toward the end of the

year in response to seasonal buying by Chinese utilities ensuring sufficient supplies over thenorthern winter and Chinese New Year.

Thermal coal prices continued the downward trajectory witnessed throughout most of 2013in the first quarter of 2014, underpinned by increased world production, expected weaker

demand growth in emerging economies and reduced activity around Chinese New Year. TheNewcastle thermal coal price was around US$74 a tonne in mid-March. While lower prices

have forced some marginal producers to close, others have increased production to reduceunit costs and remain viable. While consumption is forecast to increase, this extra supply is

expected to continue to place downward pressure on prices throughout the remainder of2014.

Negotiations for the Japanese Fiscal Year 2014 (JFY, April 2014 to March 2015) benchmark

contract price for Australian producers commenced in early March. Given the extended periodof low Newcastle spot prices in the lead up to these negotiations, the benchmark contract

price is forecast to decline by 15 per cent to be settled at US$81 a tonne.

The global supply overhang is expected to persist in 2015, with contract prices forecast todecline by a further 3.7 per cent to US$78 a tonne in JFY 2015. From 2016, the market balance

will tighten as import demand continues to increase and supply growth eases as pricepressures in the preceding years force less competitive mines to close. The contract price is

projected to rise to US$89 (in 2014 dollar terms) by 2019.

There are two major risks to the price outlook. On the demand side, Chinas effor ts to reduce

air pollution and associated measures to reduce coal-use may force the transition away fromcoal at a faster pace than expected. Should this occur, growth in Chinas imports will be lowerthan projected, placing downward pressure on prices. On the supply side, if Indonesias plans

to curb production growth are unsuccessful, exports will grow at a faster pace than projected,which could reduce the possibility of higher prices post-2016.


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Figure 1: JFY thermal coal prices

40

80

120

160

1999 2003 2007 2011 2015 2019

JFY 2014US$/t

Source: BREE.

Thermal coal consumption and trade

Increased concern about the ef fect of coal-use on the environment has promptedgovernments around the world to reconsider their energy strategies and optimal energy mix.

In line with their stage of economic development and the larger size of the service sectorcompared with manufacturing, growth in energy use in advanced economies will be relatively

slow. As such, their energy strategies have a greater emphasis on environmental amenity, and a

push to accelerate the transition away from coal into other, lower carbon options.

Emerging economies have limited, if any, policies in place to limit carbon emissions, and are

expected to expand their coal consumption to fuel economic expansion and improve theircitizens standard of living. The relative abundance, low-cost and wide geographical dispersion

of coal resources and the reliability of coal-fired technology will continue to support its use inthese economies. Given that most of the forecast growth in world energy demand will come

from emerging economies, coal is expected to continue to feature prominently in the worldenergy mix.

In line with higher consumption, world coal trade

Documents

BREE - Mar 2014 - Resource and Energy Quarterly