The U.S. and Israeli war against Iran has changed the global market for liquefied natural gas (LNG), providing a boost to producers outside the Middle East that will likely last long after the current conflict ends.
One of the major beneficiaries is Australia, which last year slipped to the third-largest exporter of the super-chilled fuel behind the United States and Qatar.
But the effective closure of the Strait of Hormuz has shut off Qatar's LNG exports, meaning that it will likely lose second place back to Australia this year, even if the narrow waterway is re-opened and shipments resume.
The obvious short-term boost to Australia's LNG producers is through higher prices, with Asian spot assessments LNG-AS doubling since the U.S. and Israeli aerial campaign started on February 28.
Spot LNG for delivery to North Asia ended at $19.30 per million British thermal units (mmBtu) in the week to March 27, down from a four-year high of $25.30 the prior week, but almost double the $10.40 from the week to February 27.
The surge in spot prices, and indeed in crude oil-linked long-term contracts, will bolster the profits of Australia's LNG producers.
With several of Qatar's LNG plants damaged by Iranian attacks and estimates that repairs will take up to five years, the likelihood is that LNG supply will remain constrained even as new projects in the United States and elsewhere are commissioned.
Australia's LNG producers have long argued that the country is at risk of losing investment due to a combination of overly burdensome regulation around developing new natural gas supplies, excessive environmental activism and a federal centre-left Labor Party government more concerned with climate change than energy security.
But the mood has shifted with industry speakers at this week's Australian Domestic Gas Outlook Conference in Sydney expressing optimism that the Iran conflict presents opportunities that shouldn't be wasted.
The biggest of these is to leverage Australia's stellar reputation as a reliable LNG supplier to Asia to attract more capital to develop both onshore and offshore natural gas reserves.
This would allow a resolution to the long-running tension between the LNG exporters and the domestic gas industry, which has blamed the export plants for tightening the local market and driving up prices.
A gas reservation policy for Australia's populous eastern states is currently under consideration, with the industry broadly supportive.
The key is to ensure domestic supply at a competitive price, but not flooding the market with unneeded gas in order to drive prices below where producers who only sell into the Australian market would be unprofitable.
If the industry and both federal and state governments can reach a mechanism to supply the east coast markets, it would go a long way to providing the regulatory stability that the LNG industry needs to expand.
There are three LNG plants on Australia's east coast that use about 75% of the available natural gas, with the remaining quarter being supplied to the domestic market.
If new gas basins were developed, such as the Beetaloo in the Northern Territory, there would be more than enough supply to meet domestic demand as well as increasing the utilisation rates at the existing plants and possibly even supply new LNG export trains.
MINDSET SHIFT
It may seem straightforward to design a mechanism to supply the domestic market while ensuring the LNG plants can maximise output, but this issue has been unresolved for more than a decade.
The trick will be a change in mindset, with the current Iran conflict the trigger.
The federal government will have to switch to prioritising energy security over climate ambitions, and there are signs this is the case.
Australia imports almost 80% of its liquid fuels such as diesel and gasoline, supplies that have been placed at risk from the closure of the Strait of Hormuz.
But it's also the case that the countries that supply the fuels made from crude oil that transits the strait are also largely the ones that buy Australian LNG and coal, such as Japan, South Korea and Singapore.
These countries will want assurances that Australia will continue to ship these commodities, just as Australia wants assurances refined fuels will continue to arrive.
Just as the opportunities to boost Australia's LNG sector from the Iran war are there to be seized, so are the threats posed by policy missteps.
The federal government is under immense pressure from both the left and right sides of politics to impose a windfall tax on LNG exports.
The industry argues any short-term sugar hit from higher tax revenue will be more than offset from the longer-term damage to Australia's reputation as a stable jurisdiction for investment.
There is merit to this argument, but winning against a populist cash-grab will be a challenge, with politicians vulnerable to doing what will appeal to voters, even if it is poor policy.
(The views expressed here are those of the author, a columnist for Reuters)
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