01/04/2009 - 22:00

Search on for sustainable energy solutions

01/04/2009 - 22:00

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MUCH of Australia's energy development initiative is directed towards exporting vast quantities of the increasingly scarce and valuable natural gas, on which our grandchildren's grandchildren will need to rely to sustain their quality of life.

Search on for sustainable energy solutions

MUCH of Australia's energy development initiative is directed towards exporting vast quantities of the increasingly scarce and valuable natural gas, on which our grandchildren's grandchildren will need to rely to sustain their quality of life.

Despite the wealth that will be created for today's generation by producing it and shipping it abroad, Briefcase wonders whether they will thank us for leaving them this empty legacy. Ultimately, Australian energy policy needs to focus beyond an immediate timeframe and look for sustainable solutions.

In the medium term the exploitation of abundant fossil fuels offers a stepping-stone, however we need to strive to achieve a sustainable future, which must also involve a sustainable population policy.

The global market for natural gas is ultimately linked to the market for oil and a broader global requirement for energy. Currently, because of natural oilfield production rate decline, an increasingly difficult target of 3.5 million barrels (mmbbls) per annum of new liquid hydrocarbon production must be developed each year, just to maintain oil and other liquid hydrocarbon production levels steady at about 85mmbbls per day.

Most major oilfields and oil provinces around the world are now in terminal decline. Production from the North Sea, Mexico's Cantrell field and most of the Middle East's super giant fields has peaked and is on the way down.

Only in places like Brazil, Angola and Kazakhstan can further production gains be expected. And while producers such as Iran, Nigeria, Iraq and Saudi Arabia have potential to expand, achieving those gains will be problematic.

Despite the will, the funds and the financial incentive, even Exxon has failed to achieve production growth. In 2001, former CEO Lee F Raymond vowed to increase daily oil production to 5 million barrels of oil equivalent (BOEPD) by 2005, from 4.25 million.

Instead, the tally fell. By 2006, with oil prices surging, daily production averaged 4.07 million barrels of oil equivalent and Exxon extended its 5 million BOEPD goal to 2010. In 2007 it pumped just 4.17 million BOEPD per day. As prices soared in 2008 before crashing later in that year, production dropped to 3.92 million BOEPD.

The bottom line is that, despite the best technology money can buy, an almost unlimited amount of funding and a huge financial incentive to expand production, the global oil industry has been unable to significantly expand deliverability. The current glut of oil on global markets should be seen as temporary, resulting from a global decline in consumption.

Data from the International Energy Agency and Energy Information Administration shows that, after a period of five years when global oil production rose at around 1.3 mmbbls per day each year to meet rising demand, oil supply appears to have made a temporary peak in July 2008. Supply has since been constrained by OPEC cuts, which are currently running at about 3 mmbbls per day.

OPEC's production constraints have been initiated to support a falling oil price in the face of falling demand. The global financial crisis has led to a fall in demand for oil for the first time in 25 years as industrial production declines.

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Data from the major oil industry bodies indicates that production from the non-OPEC 12 nations peaked in 2004 and surprisingly, despite booming oil prices, did not rise above 41 mmbbls per day for any year after that time.

New production from places such as Brazil and some non-OPEC African nations rose though 2007 and 2008, but declines elsewhere offset those increases.

While OPEC oil production during 2009 may fall to around 28.5 mmbbls per day, as recent production quotas take effect, non-OPEC production will find the going tough in the current low price environment. Briefcase believes OPEC's crude production will stabilise through 2010 and then rise from 2011 through until 2015 as demand recovers.

Global oil and natural gas liquids production is likely to plateau at between 84 mmbbls and 87 mmbbls per day until 2012, but could move higher in response to improving demand. Ultimately, peak global oil production is likely to be apparent by 2013, after which oil supply will be constrained by production limitations.

Once the financial crisis subsides, global demand for energy will recover and regain a rising trend. Natural gas is finding increasing levels of application for power generation and as a transport fuel, especially as carbon taxes and other measures to reduce carbon emissions favour the use of cleaner and for the moment, cheaper natural gas.

Europe is trying to break its dependence on Russian gas by building new LNG re-gasification terminals along its Atlantic coastline while the outlook for Asian demand for LNG from Australia remains strong, despite short-term weakness.

During 2007 and 2008, India bought spot cargoes of LNG at close to energy price parity with oil.

Meanwhile, long-term LNG contracts at lower price levels continue to be met from legacy LNG projects, with prices linked to movements in the oil price, but from a lower base.

Over the long term, the price of both gas and LNG looks set to rise in real terms towards energy price parity with oil. New contract arrangements for the sale of LNG are more closely linked to energy price parity with oil.

Establishment of LNG export facilities in Queensland to process coal seam gas (CSG) will alter the dynamics of Australia's east coast domestic gas market.

Domestic gas producers of any sort, without access to an LNG conversion facility, will have to compete with each other in the domestic market, but companies with access to export facilities will sell their gas into the market which offers the highest returns.

Depending on the overall supply and demand balance for gas post 2014, domestic consumers could find that they are forced to compete for supply with gas which would otherwise be exported. The domestic gas price would then rise to reflect the opportunity cost of not processing and transporting gas as LNG.

So for instance, if the price of LNG at a foreign port was $A15 per gigajoule (Gj), Australian-based LNG producers would want to receive at least that price, less the cost of conversion, transport and capital contribution to the LNG facility, or about $A9.50 per Gj, if the gas was sold locally.

However if domestic gas producers can produce more gas than they can process in LNG facilities, they would look at the marginal cost of production to guide their pricing.

Briefcase calculates that, ultimately, new entrants into Queensland's CSG business, such as ConocoPhillips, will aim to produce gas for less than $A2/Gj, but at their current entrance price, total costs could be over $A3/Gj. If LNG production and transport costs add $2.40/Gj, then total costs for conversion, including capital costs, should range between $3.20 and $3.60/Gj. Adding all costs together, total costs for LNG, delivered to the customer's wharf, should be between around $A6.20/Gj.

Briefcase estimates net present values per Gj of gas sold as LNG, showing that a net present value for CSG of $2/Gj can be achieved if the sale price for gas as LNG is over $A15/Gj.

n Peter Strachan is the author of subscription-based analyst brief StockAnalysis, further information can be found at Stockanalysis.com.au

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