18/03/2019 - 14:46

Contracts, challenges for $60bn of oil and gas projects

18/03/2019 - 14:46

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SPECIAL REPORT: Major new engineering contracts show momentum is building for $60 billion of oil and gas projects in WA, but the issue of carbon policy has once again created an obstacle.

Contracts, challenges for $60bn of oil and gas projects
Woodside plans to build a second LNG train at the Pluto plant near Karratha. Photo: Woodside

Major new engineering contracts show momentum is building for $60 billion of oil and gas projects in WA, but the issue of carbon policy has once again created an obstacle.

In what has become a familiar sticking point for industry and investors in Western Australia, uncertainty over carbon emissions policy has again emerged to cloud the government’s agenda and give project developers pause.

The latest political and economic headache emerged early this month, when the Environmental Protection Authority released new guidelines calling for a net zero emissions policy.

The ruling applied to new developments that would emit more than 100,000 tonnes of carbon dioxide a year, and any projects that might be referred to the authority, such as Gorgon and Wheatstone.

(click to see a PDF version of the full special report)

The EPA cited ongoing national emissions policy uncertainty as the impetus to take action.

The state government rapidly moved to reject the EPA guidelines, arguing it was not obliged to adopt it.

The EPA later withdrew the policy and promised to consult industry, but added that it did not resile from the need to reduce WA’s greenhouse gas emissions.

Research by Macquarie Bank suggested the proposal would cut the net present value of new WA projects by between $US2.7 billion and $US10 billion, depending on the assumptions around the price of purchasing offsets.

Browse, for example, will produce about 11.7 million tonnes per annum of emissions, Macquarie estimated.

The most recent spot price in Australia’s carbon credit market was about $15  a tonne, but the entire supply of credit units is forecast to be about 14mt for this financial year.

“Operations that haven’t missed promises to regulators are grandfathered, but new projects or changes/additions to old ones must be compliant going forward,” Macquarie said. 

“In the interim, we believe that policy uncertainty, unease amongst joint venture partners, and pressure from investor groups is highly likely to delay Browse, and potentially even Scarborough.”

However, Macquarie also said the EPA’s position was a solid compromise.

Work by consultancy Reputex for the Conservation Council of Western Australia in November modelled abatement costs under potential policy changes.

A low side 15mtpa scenario would have offsets priced about $15/t leading to a cost of $225 million annually across the industry, while a high case scenario needing 60mtpa of offsets might cost $100 each, adding up to about $6 billion annually.

Woodside Petroleum chief operating officer Meg O’Neill said Woodside would need to begin ramping down trains at the Burrup Hub if the state did not settle on an emissions policy that would enable its $36 billion of LNG backfill projects to get under way.

That comprises Scarborough, which will connect to a new second train at Pluto, and Browse (see table), which will be piped long distance to use excess capacity at the North West Shelf Venture’s Karratha facility from the mid 2020s.

Woodside is working towards a final investment decision for Scarborough by 2020, and appointed front end engineering and design contractors for each development in the past six months.

Ms O’Neill said a quick resolution was needed.

“We’re in a very fast timeline, and any uncertainty creates risk,” Ms O’Neill told last week’s Australasian Oil & Gas Exhibition and Conference.

There was further confusion over how any changes might apply to projects in Commonwealth waters, given gas is being piped back to a land based processing plant, Ms O’Neill said.

Browse will be particularly problematic because the gas has a high carbon dioxide content, according to Wood Mackenzie analyst David Low, while the legacy Karratha trains that will process it would also likely have higher emissions.

Action

With the exception of the carbon roadblock, local oil and gas businesses have been busy with plans, although it will be some time before work is under way on the ground.

There are 18 projects in the pipeline with a value of more than $60 billion between them.

Much of that is attributable to Woodside, although Chevron, Shell and ConocoPhillips are advancing big developments.

Chevron gave the green light to the Gorgon stage two project in April last year, estimated to be worth about $5 billion.

The development included infill wells and subsea work at the Gorgon and Jansz-Io fields.

The second serious backfill development is the Jansz-Io Compression project, which will extend the life of wells in those fields by pressurising the gas.

Norwegian contractor Aker was selected for engineering work earlier this month.

The Jansz-Io compression project will be the first time a subsea compression system has been used outside of Norway, with the usual model requiring a semi-submersible platform.

Speaking at the AOG conference, Chevron general manager of major capital projects Jeff Schmoll was bullish about the flow-through for local jobs.

“It will provide significant local opportunities for front-end engineering and design,” Mr Schmoll said

“These opportunities include all onshore components as well as potential scopes across local engineering, project management, fabrication, onshore construction, subsea installation and support.”

A third Chevron gas project under consideration, the Clio-Acme development, will be linked via a new pipeline across the Carnarvon Basin into the Woodside Petroleum-operated Burrup Hub.

Clio-Acme reportedly holds 3.5 trillion cubic feet (tcf) of gas.

Mr Schmoll touted that project as the next chapter of collaboration in the Carnarvon Basin, with Chevron to build a pipeline across the basin that would make smaller gas fields, owned by third parties, economic.

Gas would be piped to Karratha to be processed under a tolling arrangement.

“An interconnected gas gathering system means more gas getting to the right place and the right location, when it’s needed, and provides the flexibility to bring on long-term domestic gas because of the development of hydrocarbon fields that might otherwise languish,” Mr Schmoll said.

The three projects together will involve about $12 billion in capital spending, Chevron has estimated.

Shell has its own backfill project planned for the Prelude FLNG facility, at the Crux field.

Crux has around 2tcf of gas reserves and will require five wells.

A final investment decision is expected in 2020, with start-up due in 2025.

Wood plc and KBR have been selected for engineering work at Crux.

ConocoPhillips and Santos are both working on backfill projects for the Darwin LNG plant, with an infill development at Bayu-Undan recently completed.

Next on the agenda to backfill Darwin will be the Barossa field, with an investment decision flagged as early as the final quarter of this year.

Barossa holds about 3tcf of gas, and will cost about $US4.4 billion to build, consultancy Wood Mackenzie has estimated. 

Modec and a consortium of TechnipFMC and Samsung Heavy Industries were selected for an engineering competition designing the floating production platform in June, while WorleyParsons Intecsea was selected for subsea engineering.

Santos’s annual report shows the design work and long lead contracts were worth about $50 million.

Woodside has let a large number of contracts.

In October, the company selected US-based Bechtel for engineering and construction work at Pluto train two, and KBR was selected for Browse concept definition work.

McDermott International, Subsea Integration Alliance, Saipem Australia and WorleyParsons Intecsea were all awarded engineering work for Scarborough in January, while Wood was chosen for engineering work on the floating production platform in August.

Woodside’s Ms O’Neill said the company would be holding supplier briefings in coming months.

“For the construction phase, we anticipate that local supply chain opportunities would increase after we reach final investment decisions,” she said. 

“Some specialist components that require global capabilities not currently available in WA, such as the offshore floating facilities and LNG train modules, would need to be constructed overseas. 

“But we want to maximise opportunities for WA businesses and build local capability.”

Woodside also made moves on phase two of the Julimar/Brunello gas development, which links into Chevron’s Wheatstone plant, appointing OneSubsea Australia and Diamond Offshore for engineering.

Despite the big surge in engineering work, the number of engineers in the state’s top 10 engineering businesses increased only 1.4 per cent, according to BNiQ Search Engine data.

That follows a 22 per cent increase in the year to March 2018.

Higher staffing numbers were reported by GHD, increasing by 130 people to 480, and Clough (although the number was not available for publication).

GHD remains in third position on the list, while Clough rose one spot to be in fourth place.

One further deal that will affect the list is WorleyParsons’ acquisition of Jacobs Engineering’s energy, chemical and resources division, which will be completed in coming weeks.

A combined entity would still not be large enough to take Wood’s crown as number one on the BNiQ list, however, with that company reporting 920 engineers in WA.

Winners of ongoing operational contracts included ABB, which was selected for offshore support services and power at Inpex’s Ichthys, a deal worth about $200 million.

Optimism

Deloitte Australian oil and gas leader Bernadette Cullinane told Business News there was strong global activity in LNG, with recent project sanctions in Canada, the US and Qatar.

“After a dearth of LNG final investment decisions over the past several years, 2019 is going to be a big year,” Ms Cullinane said.

“(In Australia) there will be brownfield expansions of existing facilities, and many new, perhaps more creative approaches of how to keep existing facilities filled.

“With the possible exception of Pluto LNG train two, we probably won’t see a new LNG train for at least the foreseeable future in Australia, but that doesn’t mean that there isn’t a lot of activity.”

She was confident many projects would happen.

“The majority of them will go forward and will provide that next wave, a lower-cost wave, of LNG production than what we’ve had in the past decade,” Ms Cullinane said.

A further trend was the emergence of smaller scale projects.

“There will be more floating LNG projects, outside Australia,” she said.

One Perth-based business hoping to bring that trend to WA is Western Gas, which plans to use a floating liquefaction plant to pump gas from the Equus field in the Carnarvon Basin.

The facility would be moored off Ashburton and would produce 2mtpa of LNG.

The project is expected to cost $US3.5 billion and a final investment decision is planned for 2020, with first gas targeted for 2024.

Western Gas selected Baker Hughes a GE company and McDermott International, as master contractors in December, with front-end engineering and design work under way.

Finish line

A series of projects has been completed in the past 12 months, including Inpex’s Ichthys.

Ichthys was originally slated to cost $US34 billion but came in at either $US40 billion (according to Inpex) or $US45 billion, according to joint venture partner Total.

The two had a December disagreement about how to account for post-production capital.

Shell’s Prelude is also effectively complete although commissioning work is still under way.

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