Oil Search Warns on Possible LNG Glut

Australian energy producer Oil Search Ltd is warning of a possible glut of liquefied natural gas (LNG) in coming years when several large projects come online.

Oil Search chief executive Peter Botten said there would be strong competition to supply various markets with natural gas and many companies vying for that right.

"There is undoubtedly the potential for oversupply and there are a whole number of reasons why that may or may not take place," Mr. Botton told journalists on Tuesday.

He said the pace of world growth would be a factor, as well as the health of Asia's economy.

"There are also technological changes taking place in the gas business, including the development of gas shales in the US, which has changed the market there," he said.

In Australia the A$43 billion (US $38.67 billion) Gorgon gas project off the north-west coast of Western Australia is due to come online in 2014. The Wheatstone gas project, also offshore from WA, is expected to begin production in 2016.

Gorgon is believed to contain about 40 trillion cubic feet (tcf) of LNG, enough to power a city of one million people for 800 years.

The US $15 billion (A$16.68 billion) Papua New Guinea LNG project, in which Oil Search has a 29 percent stake, is expected to commence production in 2014 and has at least 9.0 tcf of gas.

"Quality projects with good, sound economics and good-quality reserves are generally the ones that get to market first," Mr. Botten said.

"PNG LNG itself is seen to be a very high-quality project with a high-quality resource base," he said.

UBS analyst Gordon Ramsay said new gas projects, which typically take about five years to begin producing, would not be built unless buyers were already lined up.

"When people talk about oversupply, that can only really happen if the market turns down after buyers have committed," Mr. Ramsay told AAP.

He said buyers may have a growing market power in setting prices with some planned projects.

"Certainly for the ones that are less advanced, the ball is now in the court of the buyers who are probably exerting a little bit more pressure on the pricing in terms of LNG contracts," Mr. Ramsay said.

 (C) 2010 AAP via Asia Pulse Pte Ltd.