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40 tcf over 40 years = $40 billion Partners endorse Gorgon LNG: Chevron, Exxon and Shell move ahead with giant offshore project near Australia; first cargoes in 2014 Allen Baker For Petroleum News
Chevron and its partners have given the long-awaited final investment approvals for the giant Gorgon LNG project off western Australia. The announcement came Sept. 13 after the companies received the final federal and state approvals.
According to Chevron, the project is currently estimated to cost a staggering $37 billion (U.S.) just for the first phase of development. That makes it the largest resource development project in Australia’s history. It’s also a quarter of the total market capitalization of Chevron.
The cost estimate was the first to come from the companies involved in the venture, which include ExxonMobil and Shell.
“With a total resource base of more than 40 trillion cubic feet of gas and an estimated economic life of at least 40 years, Gorgon will be a major contributor to our company’s future growth,” said Chevron Chairman Dave O’Reilly in a statement. The energy equivalent in crude oil would be around 6.7 billion barrels.
Environmental hurdles The project managed to surmount a long string of environmental hurdles. The liquefaction plant will be built on Barrow Island, home of endangered sea turtles but also a significant complex of oil wells. Federal and state governments in Australia required a long list of stringent conditions as part of their approvals.
Gas will be shipped to Barrow Island via twin undersea pipelines totaling 150 miles from the offshore Gorgon and Jansz-Io fields. Development facilities in those fields will be installed on the ocean floor in water up to 4,000 feet deep.
Gas from the Gorgon field is high in carbon dioxide, and the project is planning what will likely be the world’s largest carbon dioxide injection system. Carbon dioxide will be pumped into storage reservoirs about 6,000 feet beneath the island.
Gorgon was discovered in 1981, but the costs and complexities kept development out of reach for more than three decades. In recent years, Chevron and its partners decided to essentially double the LNG sendout capacity and link the Jansz and Io fields to Barrow Island along with Gorgon. Jansz and Io were discovered in the 1990s.
At long last, the governments of Australia and the state of Western Australia went along, and the partners have started writing the big checks needed to move forward. By the end of this year, signed construction contracts are expected to total around $8 billion.
On Barrow Island, the partners will build a three-train liquefaction plant that will ship out 15 million tonnes of liquefied natural gas each year. That’s the equivalent of 721 billion cubic feet of gas, or about 2 bcf each day. Current demand in Asia totals about 120 million tonnes, or 16 bcf per day.
Customers signing up Chevron has locked up long-term sales contracts for the bulk of its half of the plant’s production. Those include a deal with South Korea’s government-owned Kogas signed the day after the investment decision. That contract with the world’s largest LNG customer is for 1.5 million tonnes annually, which some analysts estimate is worth $25 billion or more over its 15-year term. There’s an option for a five-year extension.
Other long-term contracts call for Chevron to supply more than 4 million tonnes annually to Osaka Gas, Tokyo Gas, and GS Caltex of South Korea. Osaka Gas and Tokyo Gas are buying equity shares totaling 2.25 percent of the project as part of those supply deals, leaving Chevron with 47.75 percent.
ExxonMobil says it has sales agreements to ship its 25 percent of the Gorgon production to PetroChina and to Petronet LNG Ltd. of India.
Shell has a 20-year deal with PetroChina for up to two million tonnes of LNG annually, but hasn’t announced destinations for the rest of its share. Shell does have a 20-year contract for half a billion cubic feet worth of capacity at Sempra LNG’s import terminal in Mexico near the California border, as well as other import capacity around the world.
In addition to the LNG exports, Barrow Island will have a processing plant for gas to be shipped to the mainland on another undersea pipeline.
Coming Asian LNG Glut? Approval for the Gorgon project and its associated supply contracts will complicate matters for other large LNG projects being considered in the Asia-Pacific region.
Big new plants in operation or near completion in Qatar can supply Asia as easily as Europe. LNG is now flowing from Russia’s big Sakhalin project.
The BP-led Tangguh plant was recently added to the supply equation. It started sending out cargoes in July, but both trains were shut down earlier this month for technological fixes.
Tangguh now expects to ship around 16 cargoes this year rather than 56. In the longer term, however, that plant will provide about a billion cubic feet daily of LNG equivalent or 7.6 million tonnes of LNG annually.
Appetite declining Just a year ago, Asia’s hunger for LNG appeared almost limitless, with cargoes being diverted from the Atlantic market to fetch prices in the range of $20 per million cubic feet. But times have changed.
As Neal Tomnay of Wood Mackenzie put it at Gastech 2009 in May, “The combination of the global slide into economic recession, the dramatic growth in gas availability from unconventional sources in North America, and the largest wave of new LNG supply ever to hit the global market have contributed to a global gas glut.”
Tomnay expects the Pacific market will stay tight into the 2013 to 2015 period as China’s demand for clean-burning gas provides a floor for long-term supply contracts. But he says the balance is delicate and could shift over the next few months.
Wood Mackenzie’s analysts figure there’s a need for an additional 28 million tonnes of LNG annually in 2015, while Gorgon and a handful of other projects being considered in the Pacific could yield as much as 44 million tonnes of new supply annually.
The supply-demand equation could well complicate plans for the Kitimat LNG export facility on Canada’s West Coast, as well as any dreams of sending LNG from Alaska to either Asia or the West Coast of the United States.
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