Propelling jobs and investment, and milking high tax revenues, the three LNG export terminals were tipped to be Queensland's second-largest export industry, worth more than $10 billion, by the end of next year. Such an outcome is no longer assured. Unlike the East African republic of Mozambique – which quite sensibly embraced "unitisation", allowing the oil and gas majors to develop one project together and calculate their respective economic interests by the amount of gas they contributed – three separate projects were built at Gladstone at great expense. Three plants, three lots of infrastructure, three workforces. Now the high capital costs appear to be just the beginning of a world of pain for the financiers. Oil link conundrum Illustration: Michael Mucci.

Gas prices have been linked to oil prices for entirely historical reasons. The oil price has halved and so, too, the price of gas. The gas majors conveniently keep their contracts, even their reserves, a secret. Thanks to their cartel-like behaviour they are able to stiff consumers with price rises even when globally, the price of gas is falling. According to a report by the Reserve Bank, the pricing of LNG exports in Australia is "based on conventions in the Asian LNG market, which involve long-term contracts linked to the price of oil". It is constantly reported that the gas export terminals have " long-term oil -inked contracts". But what exactly does this mean? The RBA says contracts have become more flexible since the 1990s and "incorporate additional features to address pricing risk".

"Some newer contracts have flexibility on fixed destination clauses and take-or-pay commitments, and a greater share of sales contracts are under more-flexible free-on-board (FOB) agreements. Long-term contract price arrangements can often be subject to periodic renegotiation (e.g. every three to five years). Renegotiations may occur due to bilateral agreement or can be triggered contractually by large oil price movements." Financial analyst Bruce Robertson says the huge move down in the oil price is likely to trigger contract renegotiations. "We have already seen Sinopec opt for such a renegotiation with Origin Energy's APLNG consortium". APLNG, one of the three Gladstone terminal consortiums, is 25 per cent owned by Sinopec and is due to commence shipping next quarter. Some 7.6 million tonnes a year of the 8.6 million-tonnes capacity is due to be shipped to China, with Kansai Electric taking the rest. Serious doubts have arisen lately over the ability of the biggest customer for Origin Energy's $24.7 billion liquefied natural gas project to take delivery of the gas. Market has had it that the Chinese buyer may seek to slow the ramp-up of production, causing a hit to Origin's 2015-16 earnings.

Indeed, Origin has just raised $2.5 billion in equity on the sharemarket, while its more-distressed peer Santos is agonising over its options to raise capital and/or sell assets. As in the coal cycle, history is repeating in gas. The three major export LNG markets are Japan, Korea and China. Confounding the forecasters, demand from all three countries has declined, not rapidly risen. As analyst Bruce Robertson, who exposed the overbuilding, or "gold-plating", in the electricity sector points out, "As was the case in electricity, even after the peak in demand, it seems to be still widely accepted that demand for gas is rising, not falling". Japan's LNG imports for the first six months of 2015 were 43.29 million tonnes, down 2.2 per cent from a year earlier. From January to June this year, South Korea's state-owned Korea Gas Corporation reduced its LNG imports 17.1 per cent. Meanwhile, domestic sales fell 7.4 per cent thanks to an economic slump and higher coal and nuclear usage for power generation. As for demand from China, during the first eight months of this calendar year, demand has been listless, with LNG imports down about 0.45mt (minus 3.5 per cent).

"In Asia, as in Australia, energy efficiency has also taken hold and lowered demand," says Robertson. "This is a far cry from the scenario of ever-expanding Asian demand that was spread by the industry prior to getting their rushed approvals for their Gladstone LNG plants." Even in the face of falling demand from China, however, the Department of Industry is still forecasting a sprightly 8.9 per cent per annum growth out to 2020. As in electricity, the forecasters have got it wrong and are desperately clinging to the bullish estimates of yesteryear. It is true that overall gas demand in China is growing strongly, albeit from a relatively low base of 5 per cent of total primary energy consumption in 2013. Demand is projected to grow from 178 billion cubic metres in 2014 to 297 billion cubic metres by 2020. It is also true that the oil price might suddenly rebound and, as gas is linked to oil, so gas prices may recover. Is this likely though.

The price of oil is infamously unpredictable and subject to geopolitical risks from one of the world's most unstable regions, the Middle East. Logically, oil is a finite substance and the price will recover at some stage, and with it the price of gas … perhaps. Robertson believes, though, that this link may be broken. It is a theory little expounded by the mainstream but the prospect of oil and gas "decoupling" is increasingly credible. Oil for power generation, he says, has been superseded by other fuels for some time now, yet this was the original reason for gas and oil prices being linked. "The US-based producers are already bucking convention and are looking to sell their gas based on the Henry Hub gas price." Unlike Australia's gas market, which is controlled by a cartel, the Henry Hub is a true gas spot market with liquidity and transparency. However, it is not just the Americans pushing for the gas price to decouple from oil. Supply of LNG is expanding rapidly out to 2020 as oil and gas companies have all seen the same opportunity globally and looked to nab a share of that growth.

Australia has several projects on the east coast, the North West shelf and off Darwin, all of which will have Australia's LNG capacity almost quadruple from just over 22mtpa in 2014 to over 80mtpa in 2020. These are RBA numbers. The US, which up until now has not been a significant exporter of gas, is tipped to become a major player by 2020, with total capacity of 67.5mt. Globally, installed LNG capacity is expected to rise 65 per cent between 2014 and 2020, with about 170mt of nameplate capacity coming online. All this capacity is designed to cater for demand, which is actually falling. "Much of this increase in capacity is fully committed and either nearing completion or with significant capital already sunk," says Robertson.

"While the LNG industry confronts a difficult time out until 2020, it is in the longer term when the real squeeze will come on the higher-cost producers such as the three Gladstone plants." China is the major destination of most of the growth in Australian LNG exports. This market, though, now has a very large competitor – Russia. Two enormous gas pipeline deals will have most of the Chinese market for Australian LNG sucked away by China's Western neighbour after 2018 when the pipelines are built. Russia's No. 1 gas producer, Gazprom, expects to ship 30 billion cubic meters (bcm) of gas a year under the deal between the two nations, on top of an agreement in May for Russia to supply China with 38bcm a year after 2018. According to the Reserve Bank, China was importing 25bcm of gas in 2013. Each Russian pipeline deal is larger than China's entire importation of LNG in 2013. This is a colossal supply risk to Australia's LNG export future.

They are likely to keep the lid on global LNG prices for the foreseeable future. Piped gas is inherently cheaper than LNG because LNG must be liquefied in an energy -intensive process that uses expensive plants. While Australia is rich in energy it is poor in energy policy. The spectre of having three profitable LNG plants operating at Gladstone in 10 years is diminishing quickly. The economic fundamentals simply do not stack up.