Let's rewind the clock to the heady days between 2010-2012.during this period, it seemed that LNG projects dominated the news. Regular headlines predicted high and continued LNG prices, insatiable demand, and new projects - with larger and increasing numbers of trains being proposed regularly. Previously held metrics, such as the requirement to certify 1P reserves at least 125% of required volumes, low feed-in gas prices (I have used a metric of $2/MMBtu but those days seem over), controlling labor and capital constraints by promoting joint infrastructure (as demonstrated by Qatar), project development to be managed by experienced companies, and stepwise expansion of projects, were dismissed as no longer justified. Arguments such as 'this time things are different' were used - a situation very much similar to the dot-com boom a decade earlier.

What was surprising was that this feeling of euphoria was being stoked all stakeholders - buyers, sellers, media, government, and the financial community - with very little dissension. Any questioning of reserve volumes, capital / labour resource limitations, and increasingly higher breakeven costs were dismissed. Speed to market was king - and as we saw for the Pluto project, may have led to some increasing costs - since there was a limited window of opportunity that everyone was chasing. At the 2012 APPEA conference, the industry 'high water mark' in my opinion, the air of invincibility promoted by some project sponsors as they dismissed any competitive threat from North American or East African projects was reminiscent of many dot-coms before their fall from grace. Limited attempts to question this view, by myself (see my blogs from the past few years on this subject) and others, was regarded as overly pessimistic.

Today, the situation has dramatically reversed. Instead of new projects being proposed, we see cancellations / postponements (Browse LNG, Arrow LNG), massive cost increases (Gorgon, GLNG, and I am sure others as well), project sponsors proposing to sell all/portion of their stakes (Browse LNG, GLNG, BG), sustained community opposition to gas development (Queensland, NSW, Onshore WA), and the very real competitive threat from North America and East Africa. Instead of the prospect of having too much unconventional gas, Queensland LNG projects are being forced to contract conventional gas at double domestic prices to feed their future plants. CSG reserves are proving harder to add than original expectations with increasingly complex and expensive wells likely to be required. Community opposition has made land access difficult and, in the case of New South Wales, effectively off-limits in the near-term. Future shale gas reserves are looking quite expensive and are many years away from making an impact on the domestic gas balance. For the Queensland projects, analysts are no longer predicting expansion projects and some sponsor companies, such as BG, Shell and Kogas, are sounding increasingly cautious - and all three of these companies have become very active in North American LNG and East Africa LNG (not withstanding Shell's bid for Cove Energy in Mozambique). Lower cost US and East African LNG projects are becoming increasingly real and, as I have always maintained, the oil-price link to LNG prices is not going to be as predictable in the future as many of these projects will adopt different pricing schemes, much to the chagrin of Australian project sponsors that are loathe to entertain any shift from the pricing status quo.

It may be too early to extrapolate lessons from this experience. However, some key points can be concluded. Firstly, a resource project has to be driven by the underlying resource - not the market or the wishes of the shareholders. If the reserves are not proven - or too expensive to extract, companies and senior management should have the 'cajones' to rethink their ambitions. Hope is not an acceptable strategy when projects cost billions of dollars. Secondly, prepare for the unexpected - and do not forget that the commodities business is cyclic. Australian LNG cannot justify a premium in the market - political risk in Australia is really not that much better than other countries - just see how the government debates resource tax policy continuously. Thirdly, a project has to be able to compete in the marketplace - if you cannot, you will be relying on contractual terms to bind your customers who will increasingly resent this relationship. In the past, when the LNG market was smaller and the supply options limited, security of supply was paramount. Today, with many more supply options and a plethora of trading companies willing to sell spot cargoes, I question the sanctity of contract can be maintained if the price is higher than the prevailing supply options. The 2011 Japan quake proved that the world's LNG supply system is robust and can respond quickly to massive shifts in demand without supply disruptions. Do the LNG buyers really want to read interviews by senior Australian executives justifying their project economics by the fact that customers are 'stuck' and price review clauses are not going to make a big difference instead of the strength of the project itself? It is hard to have a 20 year supply agreement when its premise is not mutual benefit but the fact that the other party has no choice but to accept the contract terms sounds like a bad marriage - and bad marriages do not last, usually ending in tears for all. The final lesson is that the Australian government has to shoulder part of the blame. Instead of playing the role of the regulator, it became the loudest cheerleader. Instead of using its position to encourage companies to share resources and work together (the lack of coordination in Gladstone is a perfect example), it cozied up to the companies who promised them jobs and taxes. Should the government had played a more active role in regulating the projects and their schedules do avoid the overheated demand for labor and capital (much like the government of Qatar did during its own massive expansion and the Government of Norway does today ? Isn't the US effectively doing the same thing via its permitting process?)

So, where do we go from here? There is no doubt the committed FID projects will get built. In the case of the Queensland projects, will there be enough proved reserves when the export plants are ready? If not, we will see more diversion from conventional resources to the LNG plants. Local gas prices will rise, and the consumers in Melbourne, Sydney and Brisbane will be justified in asking whether their higher electricity and gas prices are not, somehow, subsidizing LNG exports to China and Japan. A political hot-potato!

Whether exported LNG can be competitive remains unknown - all new Australian projects, whether in Queensland, NT, or WA, will be at the high end of the cost curve. If marginal Asian prices fall to US export levels as I expect they will, expect Australian projects to first force their long-term buyers to stand by their binding contracts but when this position gets difficult (especially with buyers that are companies that were planning to resell their contracted LNG volumes such as Petronas, Shell, and others), expect sales at marginal prices and companies taking massive capex write-downs.

Or we can just pray that Asian LNG prices will stay high, US projects do not get their export permits, Australian consumers will happily see their energy prices double without complaint, and all the past sins are swept under the table - and everyone looks like a hero.

Interesting times for all.