May 27, 2019 [Reuters] – EnergyAustralia, Australia’s third-largest energy retailer, on Wednesday agreed to buy gas from a liquefied natural gas (LNG)import terminal planned by a Japanese-backed joint venture, in the first of several deals needed for the project to go ahead.

The Port Kembla LNG terminal is one of five proposed LNG import terminals that could help meet a looming gas shortage in southeastern Australia, even as the country is set to become the world’s top LNG exporter.

EnergyAustralia is the first customer to sign up to buy gas from Port Kembla, to be operated by a joint venture called Australian Industrial Energy (AIE) consisting of Japan’s JERA and Marubeni Corp and mining magnate Andrew “Twiggy” Forrest’s Squadron Energy.

AIE is looking to lock in customers before making a final investment decision on the A$250 million ($172 million) project that will park a ship, or floating storage and regasification unit (FSRU), at Port Kembla, about 100 km (62 miles) south of Sydney. It would import about 2 million tonnes a year of LNG.

That would be able to supply about 100 petajoules (PJ) annually to New South Wales, Australia’s most populous state, which relies on neighbouring states for most of its gas.

AIE has agreed to supply 15 PJ a year to EnergyAustralia over five years starting from January 2021 at an oil-linked price, the companies said.

“It’s an agreement that provides their business with certainty in the face of increasingly challenging domestic gas market supply,” Squadron Energy Chief Executive Officer Stuart Johnston said in a statement on behalf of AIE.

Australia’s Department of Industry, industry executives and analysts have predicted that only one or two of the five LNG import terminals are likely to go ahead. That is because LNG import prices are forecast to be higher than domestic gas by the mid-2020s and there is not enough demand.

Credit Suisse analyst Saul Kavonic said retailers like EnergyAustralia could afford import prices as they value the capacity flexibility and can pass on the costs to customers.

“But utility and retail demand may be insufficient to get AIE’s project over the line. Getting more price sensitive industrial buyers to sign up presents the challenge for AIE, as many can’t afford import pricing,” he said.

Three industrial buyers have turned to one potential local source — Santos Ltd’s long-delayed $2 billion Narrabri coal seam gas project, which could supply up to half of New South Wales’ gas needs.

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