Is Australia’s LNG-based resources boom about to be blown apart before it even has time to get going?

For the first time a major global gas producer has called for production quotas and cuts like OPEC, to boost prices that have dropped sharply in the past year as gas supplies have flooded markets and the US has suddenly stopped most imports.

The call will have to be noticed in Australia, because we are already a major exporter of Liquefied Natural Gas (LNG) and will become the biggest exporter of LNG from the 30-member OECD (the rich country club) by 2015.

Projects such as Gorgon, Pluto, Wheatstone, all in northern Western Australian waters, and coal seam methane projects in Queensland (at least four), will be the building blocks for our surge, which the Reserve Bank regularly points to in each assessment of the economy.

The Financial Times reported this morning that Algeria, one of Europe’s three biggest gas suppliers is calling on fellow gas exporting countries to cut production to boost prices.

“It is the first time Chakib Khelil, Algeria’s energy minister, has made such a clear plea for united action and highlights the strong pressure gas producers are facing because of oversupply, especially in Europe.”

Global gas prices have dropped off the back of a plunge in gas prices in the United States, which is now on the cusp of being gas independent.

That’s followed a drop in demand in the US, Europe and Japan for gas (and LNG) because of the global recession and from a sudden and dramatic explosion in new supplies.

That’s coming from the surge in what’s called “unconventional gas” supplies. That’s gas being produced from so-called tight rocks and from shale (shale gas) and some coal seam methane.

The search for unconventional gas is surging in Europe, China (where Shell and even some Australian companies such as Arrow Energy) have areas. Poland, Germany, the UK, France and other countries have huge areas of shale and tight rocks that hold gas that can’t be extracted by conventional methods. Canada is expected to start producing and exporting unconventional gas from huge fields discovered and now being drilled in British Columbia (near Vancouver).

Unconventional gas is produced by so-called “fracking” where a a hole is drilled into the target formation and then moved horizontally: chemicals are pumped down and the pressure lifted and the surrounding rock is fractured and the gas released. The process involves drilling far more holes than with conventional gas production.

So dramatic has been the impact on the US that the industry is now talking about gas self sufficiency for the next century. The US has slashed imports of LNG (it’s why the projects touted for California by BHP and Woodside have died).

This, and the recession, have led to a dramatic fall in US prices from about $US13 per million BTUs (British Thermal Units, the international measurement of gas) in mid-2008  to less than $US5 a million BTUs at the moment. That is forecast to fall to about $US3 by the northern summer as more gas is produced and remains unsold.

The recession has helped: gas consumption last year fell by more than 3% globally and an oversupply is now forecast to 2014-15.

These dramatic changes have not featured in any of the forecasts of demand for Australian gas, the growing resources boom and the forecasts for the Australian economy.

It is dramatic. Already Russia, which was the world’s biggest gas producer, looks like it was overtaken by the US in 2009, with the change being driven by surging production of shale and coal seam gas.

In the US and some European countries, there’s now talk of accelerating the construction of gas-fired power stations and closing coal-powered facilities; to cut carbon emissions and lower costs. It would also help finance the gradual build up of renewables such as solar and wind power.

Australia has huge shale reserves in Queensland and there are large areas of right gas formations around the Cooper Basin in central Australia. The coal seam gas boom in Queensland though is our major source of unconventional gas, but the surge in overseas supplies will have an impact there.

Major exporters to the US and Europe, such as Algeria, Qatar (the world’s biggest gas exporter) and Russia are now looking to ship more gas into Asia, where Australia is already poised to become the major LNG supplier.

The FT report this morning said: “If countries such as Qatar and Russia agree with the plan, it could transform the natural gas market and lead to higher prices. For the first time, analysts now suggest such agreement could be possible, if, as several expect, prices fall further in the coming months.”

The FT said the Algerian minister will propose the plan at the meeting of the gas exporting countries forum in Oran, Algeria, in April.  By then the Australian government and authorities might have awoken to the dangers posed to our forecast boom by the dramatic change in the global gas market.

The recession halved global oil prices and OPEC moved in a meeting in December 2008 to chop production and try and boost prices. World prices have doubled to their current level of $US80 a barrel.

The only thing in our favour is the immense appetite for energy in China, and soon India. China is now the world’s biggest oil importer, and the fourth largest producer. Its oil needs are expected to rise 28% this year.