02/05/2012 - 10:45

Global trends change mix for WA LNG

02/05/2012 - 10:45

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Changing global markets and local community pressures are crimping the growth prospects for big gas projects but the industry is still in a boom.

Global trends change mix for WA LNG

Changing global markets and local community pressures are crimping the growth prospects for big gas projects but the industry is still in a boom.

Cheniere Energy Partners does not operate in Australia, and probably never will, but its plans could have a large bearing on this country.

Through its subsidiary Sabine Pass LNG, it recently became the first US company to gain regulatory approval for the liquefaction and export of natural gas.

At least seven US companies are going through the same regulatory process; their focus on export opportunities highlights the dramatic changes that have taken place in the US energy market over the past one to two years.

Traditionally an importer of gas, the US is rapidly heading towards having a surplus, as a result of the unexpected surge in shale gas production.

That’s why companies like Cheniere Energy are moving quickly to convert their gas receival terminals into export terminals.

Cheniere is planning to build four liquefied natural gas (LNG) processing trains at its terminal in Louisiana, where it will convert the gas to a liquid so that it can be loaded on to ships and sent to export markets – the same export markets being targeted by Australian LNG projects.

This unexpected turn of events has left energy analysts reviewing their projections and questioning the growth prospects of Australian LNG producers.

It’s not the first growth shock to hit the industry and it won’t be the last.

It comes one year after the Fukushima nuclear accident in Japan, which prompted that country to start shutting down its nuclear power stations.

That was good news for Australian LNG projects, because gas was seen as a replacement fuel for Japan’s electricity utilities.

Allen & Overy partner Angus Jones believes some analysts have overplayed the threat from US gas exports.

He emphasises that US gas exports are highly regulated; for instance, the gas can only go to countries with a US free-trade agreement and any move that pushes up energy costs in the US or erodes energy security will be politically sensitive.

“Wholesale LNG exports from the US will not occur in the short term or be on the scale that many people have been suggesting,” Mr Jones said.  

On balance, he believes the US and Japan factors will tend to cancel each other out.

As well as these global factors, the industry’s growth prospects have been affected by local community and political pressure.

On the west coast, the planned James Price Point LNG hub near Broome is looking an increasingly remote prospect.

And on the east coast, coal seam gas projects are fighting a backlash from farmers, environmentalists and other protesters.

A boom is a boom

But amid all of this uncertainty, the industry is still experiencing what can only be called a boom.

Seven giant LNG projects are under construction in Australia, with an eighth under way in Papua New Guinea.

Collectively, these projects are budgeted to cost $178 billion.

About half that amount will go to overseas suppliers, which remains a bone of contention for local industry.

Despite that, these projects represent an enormous opportunity for local engineers, contractors, manufacturers and a myriad other suppliers (see LNG boom serves up winners).

Importantly, the opportunities don’t end when the construction of these projects is completed.

LNG projects are significant employers in their own right and, like any large and complex manufacturing plant, they require continued investment to sustain production.

Take, for example, Australia’s first and largest LNG project – the North West Shelf venture is spending $7.2 billion just to maintain its gas supplies and production volumes.

That investment often gets overlooked yet it’s a massive spend by almost any measure.

Beyond the current wave of investment, the industry’s growth will take on a very different look.

Mr Jones expects future LNG projects will increasingly be smaller, ‘brownfields’ expansions at existing sites, rather than the very large ‘greenfields’ projects that have characterised the industry in recent years.

The lower capital requirement will allow project developers to be much more flexible in their approach to sales contracts.

“I think the market will move away from the current reliance on all long-term contracts,” he said.

Mr Jones anticipates a mix of long-term, medium-term and spot sales contacts, a trend he expects will be welcomed by buyers and also create opportunities for sellers of LNG.

“The buyers will welcome the flexibility of supply from an increased number of projects and, with increased price volatility, including some movement away from strict linkage to crude oil pricing, there will be more trading opportunities.”

New developments are likely to include more floating LNG projects (see Floating LNG touted as game changer), more offshore oil fields and potentially further domestic gas plants (see Devil Creek, Macedon projects to boost gas supply to domestic energy market).

Yet another growth opportunity lies with onshore gas. Western Australia has extensive ‘tight’ gas and shale gas deposits and more than half a dozen companies are undertaking drilling programs (see Explorers line up to unlock onshore gas potential).

Pluto becomes #3

The industry reached a major milestone this week, when Woodside’s Pluto LNG project started production. 

Chief executive Peter Coleman proudly described first LNG production as a defining moment for the company, cementing its position as a major supplier of LNG to the Asia Pacific region.

This is welcome news for Woodside, which has had to deal with completion delays and cost blowouts at Pluto, which finally cost $14.9 billion.

Pluto joins the Woodside-operated NW Shelf venture and Darwin LNG as Australia’s third LNG export project. Together, these projects will produce nearly 24 million tonnes of LNG a year. 

That puts Australia on a par with other big exporters like Malaysia, Algeria and Nigeria but well behind Qatar, which produces about 77mtpa.

Seven more under way

The scale of the Pluto project is impressive, but it pales next to Chevron’s $43 billion Gorgon LNG project.

More than 3,300 workers are currently on Barrow Island and that number will peak at 5,000 next year.

The workers are readying the site for 70 pre-fabricated modules that are due to start arriving from Korea at the end of the month.

On a site tour in late March, Gorgon general manager Colin Beckett surprised seasoned industry observers when he said the project was proceeding on time and on budget.

“We are meeting our milestones, we’re firing on all fronts at the moment,” Mr Beckett said.

If the construction crews maintain their schedule, Gorgon will start exporting LNG in 2014, when the first of three production trains is due to be commissioned.

At around the same time, the Queensland Curtis LNG project, backed by Britain’s BG and China’s CNOOC, is due to start producing.

It is one of three projects that will tap the coal seam gas fields in Queensland’s hinterland and export LNG from Curtis Island, near Gladstone.

The three Queensland developments will add a further 21mtpa to Australia’s LNG exports.

On the west coast, Gorgon will be followed by another Chevon project, Wheatstone, which is getting under way at Onslow.

In addition, Shell is developing its ground-breaking Prelude floating LNG project, which will exploit gas reserves off the Kimberly coast.

Australia’s 10th LNG project will be Ichthys, being developed by Japan’s Inpex and France’s Total at Darwin.

Together, the seven projects under development will have a combined capacity of 57mtpa, taking Australia’s total LNG production to 80mtpa.

it will make Australia the world’s largest LNG exporter.

What’s next in LNG?

The rapidly changing shape of the energy industry, globally and in Australia, makes it particularly difficult to pick future development pathways.

The next big development could be any one of half a dozen projects.

The Arrow LNG project in Queensland, backed by Shell and PetroChina, is one possibility. It is aiming for a final investment decision by the end of 2013.

Likely prospects on the west coast are a second production train at Woodside’s Pluto project and a fourth production train at Chevron’s Gorgon project.

Mr Beckett said in March that engineering contractors KBR, JP Kenny and Technip were due to complete pre-FEED studies this year and that a final investment decision was likely in 2014.

The train four development would include a second trunkline and new gas fields and would cost north of $10 billion.

A fifth LNG train is also part of Chevron’s long-term plan for Gorgon but Mr Beckett said the company would probably wait until it had a production track record with the initial four trains before evaluating a fifth.

Woodside’s plans for a second train at Pluto have been blocked because it simply does not have sufficient gas reserves.

Woodside’s own exploration program has generally delivered poor results and its negotiations with third-party gas suppliers have also failed to deliver. 

The potential suppliers include US company Hess, which has been conducting its own drilling program in the Carnarvon Basin.

Hess decided late last year to start front-end engineering and design (FEED) studies on the Equus gas project.

The general expectation is that Hess will end up supplying gas to one of three LNG projects: Pluto, Wheatstone or the North West Shelf venture.

Separately, Woodside is continuing to work on Sunrise (see Floating LNG touted as game changer) and Browse developments.

With projected output of 15mtpa, Browse would be the anchor project for the proposed James Price Point LNG hub near Broome, which has attracted vigorous opposition from environmental, indigenous, community and local tourism industry interests.

Despite backing from federal resources minister Martin Ferguson, premier Colin Barnett and former Woodside boss Don Voelte, the project has not come close to proceeding.

Last month, the state and federal governments give the project owners an extra year before a final investment decision needs to be taken.

There is continuing speculation the gas could be piped south to the North West Shelf venture’s Karrratha gas plant.

That was fuelled by the news that Japan Australia LNG (MIMI Browse) Pty Ltd, which is jointly owned by Japanese companies Mitsui & Co and Mitsubishi Corporation, has paid $2 billion for a minority equity stake.

That brought the ownership of the Browse joint venture more closely into alignment with the ownership of the North West Shelf venture.

  


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