New figures have shed light on the enormous scale of the emerging oil and gas boom, for both investment and employment.
WHEN Woodside Petroleum’s incoming chief executive Peter Coleman fronted his first press conference last Friday, he said the main attraction was the number of growth options he could pursue.
“What stands out for me is the portfolio of growth projects that is here,” he said.
Mr Coleman then faced a number of questions about the multiple challenges, including government approvals, community opposition and rising costs, that stand between Woodside and its growth aspirations.
He didn’t provide the answers, nor was he really expected to, since he hasn’t even started the job yet.
But, in a way, that exchange illustrated the state of play of the liquefied natural gas (LNG) industry in Western Australia – indeed right across the country.
The industry offers unprecedented growth potential; the challenge will be delivering on the potential.
The answers should become a lot clearer over the rest of 2011, with at least three new LNG projects due to get their final go-ahead.
Shell is expected to make a final investment decision on its Prelude floating LNG project, which involves construction of an LNG plant on a specially built ship.
If all goes to plan, Prelude will be the first of multiple floating LNG developments, holding the potential to revolutionise the industry.
Chevron is expected to push the button for its Wheatstone development, which is focused on a new industrial estate near Onslow.
And Japanese group Inpex is tipped to proceed with its Ichthys project, which involves construction of a sub-sea pipeline from its gas fields off the Kimberley coast to a new LNG plant at Darwin.
Within the industry, those three projects are considered near certainties, though nothing is guaranteed.
They will be joined, at some stage over the next few years, by several other projects, including expansions at Woodside’s foundation Pluto project, which is entering the commissioning phase, and Chevron’s Gorgon project, currently under construction.
The largest growth opportunity is the Woodside-operated Browse project, which has become highly contentious because of plans to build a new LNG precinct at James Price Point north of Broome.
Collectively, these projects will cost well in excess of $100 billion to develop.
The WA projects that proceed will coincide with several giant LNG projects in Queensland.
The latter projects are based on the extraction of giant gas deposits trapped under the coalfields of central Queensland, in contrast to the sub-sea gas deposits off the WA coast.
But on both sides of the country, the gas will be put through an expensive liquefaction, or freezing, process, which condenses the gas so that it can be exported to energy-hungry customers in Japan, South Korea, China, Taiwan and elsewhere.
Two Queensland projects have already been approved, and up to two more are likely to proceed.
Collectively, these projects have put Australia on the global map, according to international energy market analysts Wood Mackenzie.
“Australia has well and truly landed as a global LNG player,” Wood Mackenzie lead analyst Craig McMahon told WA Business News.
His firm estimates that total spending on Australian oil and gas projects over the five years to 2016 will be $US150 billion. That ranks Australia fourth in the world, behind the US, Canada and Russia.
“I can’t overstate how significant that is,” Mr McMahon said.
The planned projects are likely to make Australia the world’s largest LNG exporter, ahead of current market leader Qatar.
Current export capacity is about 20 million tonnes per year, primarily from the North West Shelf venture’s Karratha gas plant. The planned WA projects will add about 60 million tonnes to annual exports, and the Queensland projects will add a further 20mt-30mt (see table).
What does this mean for local industry and for employment opportunities?
Perth consulting firm Pit Crew estimates the number of construction jobs on LNG projects will grow six-fold over the next few years.
Currently, the industry employs about 5,000 on-site construction workers, mainly on the Gorgon and Pluto projects. This excludes the thousands of workers employed in Asian fabrication yards, where most of the LNG factories are built in modular form.
Pit Crew estimates the demand for on-site construction workers will experience a massive increase, to a peak of 29,000 in the fourth quarter of 2013.
That will be followed by a slight decline, and then another similar peak in early 2015.
Most of the early demand will be driven by the Queensland projects.
In WA, the demand for construction workers is tipped to peak in the third quarter of 2015.
In addition to construction workers, Pit Crew estimates the industry will need about 7,500 project-based engineers during 2013 and 2014.
“These huge projects will change the whole dynamic of the labour market,” Pit Crew’s Peter Dyball said.
“LNG projects will no longer just be competing with the minerals sector for resources, they will now be competing with each other.”
Mr Dyball said WA in particular faced further challenges, as east coast-based workers would have an increasing incentive to find work closer to home in Queensland.
He anticipates the demand for engineers is also likely to cause problems in sourcing experienced people.
Mr McMahon agrees the industry faces some growth challenges, saying it is unlikely that all of the Australian LNG projects currently being evaluated will proceed in line with their proposed schedules.
“The biggest challenge for Australia is the cost of operating here, it’s very expensive,” he said.
Mr McMahon said there were several dimensions to this.
One was the location of the gas.
“In WA, its invariably offshore, in deep water and remote,” he said.
The second aspect was the labour shortages and high labour costs (see page 11).
Despite the challenges, Mr McMahon sees plenty of scope for growth, and anticipates Australia will achieve growing market share in the global LNG market.
This will be helped by the desire of Asian countries to diversify their energy supply away from the Middle East.
“Australia is in a strong position. Most notable is that it has a very strong reserve endowment,” Mr McMahon said, adding that exploration success was regularly adding to gas reserves.
“Year on year, Australia has been discovering reserves that resonate on a global scale.”
Australia’s relative proximity to Asian markets was another advantage.
Japan, Korea and Taiwan have traditionally underpinned the LNG market. Joining that trio is China, which Mr McMahon said would be a “material” LNG importer in future years.
Mr McMahon said it was too early to judge the impact of Japan’s natural disasters on that country’s nuclear industry, “but it would appear to be a negative”, thereby creating more opportunities for LNG exporters.
Marketing is key
Looking at the many Australian projects under consideration, Mr McMahon said he could make an economic case for each of them proceeding. A major differentiator would be the ability of project developers to lock in customers via off-take agreements.
“It’s the ability to negotiate with Asia that determines the winners and losers,” Mr McMahon said.
Another factor affecting the prospects for each LNG project is the ability of project developers to secure sufficient gas reserves.
All of the major developers, such as Woodside and Chevron, have their own drilling programs.
They can also negotiate commercial deals with other companies that have gas deposits, but do not have sufficient reserves, or the technical and financial capacity, to proceed with their own LNG development.
Chevron has pursued this strategy for its Wheatstone development, signing deals with Apache Corporation, Kufpec Australia and Shell to process gas from their fields through the Wheatstone LNG plant.
As a result of these deals, the participating companies share equity in both the gas fields and the LNG plant.
Under the latest deal, for instance, Shell will assume an 8 per cent participating interest in the Wheatstone and Iago natural gas fields in three Chevron-operated permits off the north-west coast.
Shell will also assume a 6.4 per cent participating interest in the project facilities, with Chevron remaining project operator.
Announcing the deal, Chevron Australia managing director, Roy Krzywosinski said Wheatstone was set to become one of Australia’s largest resource projects and Australia’s first LNG hub.
“A final investment decision is expected in the second half of this year once environmental approvals and other associated agreements are finalised with various levels of government,” he said.
Woodside is pursuing similar opportunities for the proposed expansion of its Pluto gas plant.
While proceeding with its own exploration program, Woodside has been negotiating with other companies, believed to include Hess and Apache.
Securing extra gas reserves is considered the major issue surrounding the Pluto expansion project, which will take advantage of infrastructure already in place as part of the $14 billion Pluto foundation project.
The development of floating LNG plants will deliver another option for the owners of relatively small, ‘stranded’ gas deposits.
Shell has been a big investor in this technology and is set to be first cab off the rank with its Prelude development off the Kimberley coast.
European company GDF Suez has proposed a floating LNG plant for its Bonaparte development in the Timor Sea, as has the Woodside-operated Sunrise joint venture.
The proposed Sunrise development is one of several issues that Mr Coleman will inherit when he takes over at Woodside.
The Sunrise gas fields are partly located in the Joint Petroleum Development Area administered by Timor-Leste and Australia.
The Timor-Leste government wants the joint venture to build a gas plant on the island, an option the joint venture insists is not technically or commercially feasible.
Protracted negotiations have failed to resolve the issue.
Another major issue Mr Coleman will inherit is the future of the Browse development, and more specifically the proposed James Price Point gas hub.
In a major breakthrough, the development gained backing from a majority of native title claimants earlier this month, but it still needs to gain environmental backing from the federal government.
That could prove challenging given the opposition from community, tourism and some indigenous groups.
There has also been a lot of speculation around whether all of the members of the joint venture, which is led by Woodside and includes BHP Billiton, Chevron, BP and Shell, fully support the development.
Clearly, Woodside is the most enthusiastic advocate for James Price Point.
There are several reasons why its joint venture partners have been lukewarm: they have plenty of other growth opportunities; they are reluctant to pursue a development that divides the community; and they see the Browse Basin gas reserves as a long-term supply option for the Karratha gas plant.
Against all of that, the joint venture partners all renewed their retention leases in December 2009, requiring them to spend $1.25 billion to ensure the early commercialisation of the gas fields.
Subsequently, in February 2010, they selected James Price Point as the site to process the gas.
It will be interesting if any joint venture members attempt to steer away from these commitments.