In January 2020, Australia became the world’s number one exporter of liquefied natural gas (LNG). The news was welcomed and criticised in equal measure by the country. As the world starts to move away from fossil fuels and embrace clean energy, questions have arisen about whether LNG is still relevant and why it is such a controversial fuel.

How is liquefied natural gas different from regular natural gas?

Liquefied natural gas (LNG) is a clear and non-toxic liquid formed by freezing natural gas to extreme temperatures. Natural gas, which is mostly methane, is liquefied to make it easier and safer to transport. The process shrinks the gas by 600 times. LNG also does not ignite in the same way that it does in gaseous form. This makes it easier to transport it to areas that import natural gas.

Australia converts all of its natural gas to LNG before exporting it to other countries. Then, specially built shipping containers transport the LNG around the world. China, Japan and South Korea were Australia’s top export destinations in 2021.

What does liquefying natural gas entail?

Turning natural gas, or methane, into LNG is not straightforward. The process was first discovered and perfected by British scientist Michael Faraday in 1820. The first LNG compressor refrigeration machine was built by the German engineer Karl Von Linde in 1873. It took another 100 years before the first LNG plant was constructed in the US state of West Virginia. Now, there are LNG compressor plants all over the world.

The first step in liquefying natural gas is to clean or purify it. Purification removes most other gases and liquids other than methane. Natural gas can contain ethane, propane, butane, pentane, carbon dioxide and water vapour, in addition to methane. A good standard for clean LNG is ensuring that it is between 85 to 99 per cent methane. Unwanted gases, such as propane and butane, can be recovered and processed as other products too. 

Most LNG plants have processing units – trains – to liquefy the gas once it is cleaned. These units cool the gas through fairly standardised processes before storing it. LNG is 600 times smaller than natural gas by volume once liquefied. Once the LNG is created, it is transported and shipped in specially insulated metal containers that keep it in liquid form. This is achieved by keeping the LNG at very low temperatures. When LNG reaches its target destination, it is turned back into gas at regasification plants. Homes, businesses or factories can then receive the gas through pipes.

Why does Australia use LNG?

Australia has approximately 108 exajoules of proved and probable natural gas reserves. The country produces around five exajoules of gas per year for home consumption and to export abroad. In other words, it has nearly two decades worth of supply left, even without any further exploration or development. Moreover, the vast majority of Australia’s gas is exported abroad. In 2019, Australia consumed 1.6 exajoules of gas domestically. Four exajoules of gas were exported abroad. All of the natural gas that Australia exports abroad is first turned into LNG using domestic processing plants.

Australia’s production and exports of natural gas took off around 2013. Around that time, several facilities in Queensland went online and started producing large amounts of natural gas. Companies argued that investment would not only bring cheap gas to Australia, but help the country transition away from coal for its electricity production. Gas production and exports expanded further between 2014 and 2015 when three more LNG export facilities opened in Queensland. Producers sought to supply growing LNG demand from Asia and at home. The country’s gas reserves are located mostly in the Carnarvon, Browse and Bonaparte basins off the Northwest Coast. Victoria and South Australia have smaller reserves too.

How does Australia use LNG?

Natural gas is Australia’s third-largest energy resource, after coal and uranium. 56 per cent of Australia’s electricity was generated from burning coal in 2019. Fossil fuels (coal, oil and natural gas) accounted for 94 per cent of Australia’s primary energy mix from 2018 to 19. 

Australia exports most of the natural gas that it liquefies to other countries around the world. Around 36 per cent of Australia’s gas consumption from 2018 to 19 was for electricity generation. That includes electricity generation by industry for smelters, refineries and mines. It also includes unprocessed natural gas used to generate electricity during the gas production process. Natural gas used at homes around Australia is not liquefied. Instead, pipelines transport natural gas directly to hubs around the country. Gas connects from those hubs to individual homes.

Also, Australia’s LNG exports are a big earner. The country earned an estimated AUD $32 billion from 2020 to 2021 in exports receipts. That is expected to rise to AUD $49 billion in 2021-22 and AUD $46 billion in 2022-23.

Why should Australia be wary of the LNG industry from an economic perspective?

Much of Australia’s development of natural gas and LNG is based on expectations of future consumption at home and abroad. But the gas industry faces serious headwinds in both sectors. Australia’s energy grid is fast-moving from coal and gas to clean energy sources, such as wind and solar power. Renewable energy is now the cheapest source of electricity in the world. Even in Australia, generating electricity from wind and solar power is cheaper than traditional fossil fuels. Huge solar farms are being built across Australia, undercutting fossil fuels.

Australian households are also expected to consume less gas in the future. This is primarily because the country now has the highest uptake of rooftop solar panels in the world. This means that a growing number of homes are generating their own electricity instead of drawing it from the grid. That also makes it cheaper for many Australians to switch from gas water-heaters and cooktops to cheaper electrical alternatives.

Lastly, a number of states are looking to phase out new gas connections over their climate commitments. In Victoria, which has the highest consumption of gas at home, some city councils plan to phase out gas connections in new homes. This would help the state reach its plans to cut carbon emissions by up to 50 per cent by 2030. Similarly, New South Wales plans to become carbon neutral by 2050.

That puts Australia’s large investments in gas at risk. Some economists say that they could become stranded assets. These are assets that turn out to be worth less than expected due to changes associated with the energy transition. In other words, a lot of people in Australia would lose money for investing in coal and gas as the imperative to move to clean energy becomes overwhelming.

Australia’s climate commitments

The federal government has been criticised for not adopting a net-zero emissions target like other countries. PM Scott Morrison has opted for a ‘gas-led recovery’ rather than a green recovery.

As climate change becomes a bigger problem worldwide, there is growing pressure to phase out fossil fuels. Australia has a particularly large challenge due to the large amounts of coal and natural gas used at home and exported around the world. In particular, Australia’s large exports of LNG have an outsized impact on carbon emissions around the world. To stop our slide to extreme climate change, every country has to play its part. If Australia continues to invest in fossil fuels, it will fuel global warming – not an economic recovery.