The reality of Australia’s 2020 LNG supply target
What is the reality of Australia’s ambition to quadruple LNG supply from the current level of 15 mtpa to a stunning 60 mtpa by 2020? Paul Jenkins examines the current and future state of Australia’s LNG industry.
“Australia is looking to position itself as the third, perhaps second, largest LNG exporter in the world…” said then Federal Resources Minister, Ian MacFarlane in May 2007. This bold statement was underpinned by the massive efforts being made by the existing and by a dozen or so candidate projects across the breadth of activities required to expand or develop LNG supply from Australia. Australia is seen as a reliable and secure supply source by Asian buyers, and Australian suppliers and potential suppliers are confident of access to these premium markets. Unquestionably there has been and continues to be vast sums of money being spent in Australia by proponents attempting to get a piece of the booming global LNG market. But what is the reality of this ambition to quadruple LNG supply from the current level of 15mtpa to a stunning 60mtpa by 2020?
Australia’s LNG industry has its foundation in the North West Shelf Project in Western Australia (WA), operated by Woodside, which has been producing LNG since 1989. The initial 3 LNG trains and North Rankin platform have been, through time, supplemented by 2 additional trains (the last of which, Train 5, is currently under construction), and additional offshore platforms (including the recently announced North Rankin 2 structure). These facilities will allow production of some 16mtpa from 2009.
Australia ’s second LNG plant is based in Darwin, operated by ConocoPhillips. Gas is sourced from the Bayu Undan Field in the Timor Sea Joint Development Zone, producing 3.3mtpa from the
single train.
The third plant in Australia will be Woodside’s Pluto Project. Kansai Electric and Tokyo Gas have each purchased a 5% share in the project reducing Woodside’s share to 90%. The plant is being constructed on the Burrup Peninsula, adjacent to the North West Shelf Project site. Production of 4.3mtpa of LNG is anticipated from end 2010.
As a result of these commitments, an increase in LNG production to around 24mtpa from 2011 appears to be in the bag, and represents a healthy first step in achieving the 2020 target. But many believe that progress to date has been disappointingly slow, and that Australia has missed many opportunities to grow its market share. Given the plethora of candidate projects, it might be thought reasonable to be optimistic about the prospects for future success. But concerns exist about the many reasons for the slow progress of the industry, which remain as inhibitors of its future growth. Notwithstanding the many positive attributes of the candidate projects, each faces considerable and varying hurdles in achieving success.
The LNG industry (including those pursuing LNG opportunities) in Australia comprises an impressive array of many of the world’s major LNG and gas players. The original North West Shelf “gang of 6” (Woodside, BHP Billiton, BP, Chevron, Mitsubishi/Mitsui, Shell), have been joined in Australia by ExxonMobil, ConocoPhillips, Inpex, Total, Eni, BG, Hess, Santos etc working in a matrix of different upstream and midstream ventures. The rivalry within and between ventures has been, and continues to be, a key drag on successful development.
The table provides a summary of the ownership interests of the existing and candidate Australian LNG Projects, in the four geographical areas of the Carnarvon and Browse Basins in WA, the Timor Sea, and Queensland’s Coal Seam Methane (CSM) fields. A significant number of important players have interests in several projects that must compete for corporate funding and for market share. Examples include:
• Woodside: North West Shelf/Pluto/Browse LNG/Sunrise
• Shell: North West Shelf/Gorgon/Browse LNG/Sunrise/Prelude-Toccata
• Chevron: North West Shelf/Gorgon/Wheatstone/Browse LNG
• BHP Billiton: North West Shelf/Scarborough/Browse LNG
• ExxonMobil: Gorgon/Scarborough (and nearby PNG LNG)
• Santos: Darwin LNG/Queensland LNG/(and nearby PNG LNG)
• Inpex: Darwin LNG/Ichthys (and nearby Indonesia Abadi)
This inter-related set of ownerships across several of the major candidate LNG projects adds a further complexity to the various costs, scheduling and permitting pressures already faced by present day LNG projects. Australian resource projects, and in particular LNG projects, are facing amongst the highest levels of these pressures.
The challenges facing the Australian LNG projects in the quest for expansion or development:
Carnarvon Basin
North West Shelf: Further expansion now appears to be off the shelf, with the focus now on extending the life of the existing 5 LNG trains, with further significant investments offshore to eke out production from existing and new satellite offshore fields. The growth agenda of the owners looks likely to be played out in the other project areas where they hold interests.
Woodside’s decision to develop a stand alone greenfield plant for Pluto gas liquefaction adjacent to the North West Shelf plant provides the strongest signal yet of the end of the North West Shelf’s expansion agenda.
Pluto: Construction is underway on Woodside’s Pluto development, which is now understood to be budgeted to cost $10.5bn. Market has been secured for most of the 1st train capacity, and Woodside’s commercial attention now appears to be on expansion opportunities. Woodside publicly expresses confidence in achieving expansion from its own source gas discoveries, but opportunities must also exist for cooperation with 3rd party gas sources. Candidate sources of 3rd party gas would appear to include Chevron’s Wheatstone Field and, in the event of any further lack of progress on Gorgon, may also include consideration of the Io/Jansz Fields being piped directly to the Burrup Peninsula, rather than to Barrow Island, for liquefaction. However, the history of lack of cooperation amongst the large gas resource ventures in Australia puts a question mark against a future successful outcome.
It is reasonable to assume that, because of its 90% equity share in the Pluto development Woodside will place a significant priority on expanding capacity and thereby achieving benefits of scale from its pre-investment.
Gorgon: It has been a long road to market for Gorgon, which was discovered in the early 1980s. Environmental approvals are in place for a 2 train development on Barrow Island. But the need to re-inject the high level of inert gas, the environmental safeguard measures, and the Western Australian resources boom have driven costs skywards, with some reports of capital costs of $20 billion. The owners have undertaken a major review, and are now progressing with a changed scope of 3 trains, with 15mtpa total capacity, requiring supplementary environmental approvals and revised FEED work. Chevron is now saying FID is another year away.
It is clear that Chevron (which owns 50%) remains very supportive of developing Gorgon. ExxonMobil and Shell may be more ambivalent given their access to other opportunities in Australia and the region.
Browse Basin
This has become an area of significant activity over recent years, with proponents of the projects jockeying for leadership position. The Federal and State Governments have intervened in proceedings by announcing a preference for a single onshore LNG hub to be shared by all LNG proponents, at a location on the Kimberley coast and under an operatorship structure to be determined, to avoid piecemeal gas project development.
Ichthys: This project appeared to have been making quiet but steady progress. The Maret Islands had been selected as the site of the LNG plant, but this may be in jeopardy given the government's intervention. In addition, recently, reports have circulated of cost concerns. On the positive side, there are reports of discussions being held with Shell, presumably in contemplation of some cooperation for integration of Shell’s adjacent discoveries of Toccata, Prelude and Crux discoveries. Shell has been publicly unusually quiet over the last few years in respect of its Australian upstream activities, but it appears to be putting significant emphasis on its operated Browse activities. Recently Shell has referred to Prelude as a candidate for the location of its first Floating LNG Plant. There is significant uncertainty on timing of supply from Ichthys and its surrounding discoveries.
Browse LNG: The original discoveries in these permit areas, Scott Reef (now known as Torosa) and Brecknock, were made in the 1970s, with little progress toward commercialization pending the development (by mostly the same owners) of the North West Shelf project. Recently, under Woodside’s aggressive leadership, a significant amount of appraisal, technical and commercial studies, and marketing has been undertaken. However, there remains significant uncertainty on timing of supply.
Timor Sea
Darwin LNG: ConocoPhillips has announced its intention to expand capacity at Darwin LNG, but its indicated start up of 2015 is far from aggressive, and probably symptomatic of reserves inadequacy. The obvious candidate reserve base to supply a second train is Sunrise, given that it holds a reported 7 Tcf of gas and that ConocoPhillips holds a 30% interest. However, there remain many obstacles to the commercialization of Sunrise.
• Australia and East Timor have now (eventually) ratified the arrangements for revenue sharing from Sunrise, which lies partially in the Joint Petroleum Development Area. Detailed fiscal arrangements are yet to be agreed between the project proponents and East Timor.
• East Timor appears to continue to advocate that the LNG plant is sited in East Timor, rather than in Australia.
• Woodside and Shell have significant parallel LNG development activities in the Carnarvon and Browse Basins, which may impact on the timing of a Sunrise development.
• Commercial arrangements need to be put in place between the Sunrise and Darwin LNG ventures to allow liquefaction in Darwin.
ConocoPhillips, in conjunction with Santos, has made gas discoveries at Caldita and Barossa in the Timor Sea, for which “commercial options are being actively pursued”. But lack of scale and possibly high levels of inert gas may adversely impact on development prospects.
It is likely that a second train will be built at Darwin LNG, but the source of gas and timing is far from clear.
Queensland Coal Seam Methane
In the last 18 months plans have been announced for 4 different LNG projects in Queensland based on that State’s significant deposits of coal seam methane, with proponents attempting to commercialize CSM by accessing the LNG market, and avoiding the limited and low priced domestic market. These CSM-based LNG projects face significant hurdles:
• Stakeholder confidence in reserves base and sustainability of gas deliverability.
• Lack of precedent for normally conservative lenders and LNG buyers.
• Lack of experience of some of the proponents.
• Similar cost pressures as faced by conventional gas reservoir based projects.
Success may be achieved by one or more of these projects, with a plant at Gladstone but development of more than one is likely to be on a sequential basis.
Returning to the Minister’s bold statement in May 2007, there is a large number of prospective projects that could collectively deliver or indeed surpass the LNG growth target for Australia. Many of these projects are owned and operated by substantial, experienced companies, have significant attributes, and are at an advanced stage of planning. But each of these projects has certain hurdles to overcome, and in all cases, the industry wide cost pressures. But perhaps the most significant factor contributing to any failure in achieving the target, is the ownership make-up of some of the projects, which inevitably lead to in-house competition for corporate funding and will lead, at best, to a sequencing of developments. 60mtpa by 2020 will not be easy!