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Australia makes bold move as LNG supplier 3 LNG plants in operation, 7 more under way; first floating LNG project approved; country will go from 4th to 2nd largest producer Bill White Researcher/writer for the Office of the Federal Coordinator
The U.S. shale gas boom has scored big headlines in the world of natural gas.
The boom has shattered old understandings of gas pricing, galvanized environmentalists, ignited a national debate over exporting resources, wounded Canadian gas producers, surprised LNG makers in Qatar and elsewhere whose target U.S. market vanished, and sparked a global scramble as countries assess their own shale prospects.
The Pluto plant opened this year and is Australia’s third LNG plant.
But almost as breathtaking is Australia’s major move into liquefied natural gas production.
Australia’s third LNG plant sent its first shipment to market in June.
The country’s seven other LNG projects under way today total a stunning $170 billion worth of development.
Even that lofty figure understates the extent to which Australia’s natural gas industry is mushrooming — it doesn’t count billions of dollars in gas-field expansions, gas-pipeline construction and gas-fired power plant building that also are afoot. And it omits the roughly dozen other LNG projects in various stages of consideration.
Australia is expanding the boundaries that define what an LNG project can be.
The world’s first floating LNG project has been sanctioned in Australia involving a massive typhoon-resistant factory ship anchored 125 miles at sea over a remote gas field. The 1,600-foot-long ship being built in South Korea for Shell will cover an area the size of 24 football fields.
Australia also is building the first LNG projects fed by coal-bed methane rather than conventional natural gas. Three such projects are proceeding, with more under discussion.
Fully two-thirds of global LNG capacity under construction is in Australia.
The country is poised to leap from the world’s No. 4 LNG producer last year to No. 2 within a few years. Many predict Australia will be LNG’s top dog later this decade, dethroning Qatar, which underwent its own audacious tripling of its LNG capacity during the past five years.
In short, Australia is poised to stake its claim to the LNG marketplace that backers of a major Alaska LNG export project and several along the Gulf of Mexico coast want to enter.
133 tcf of proved reserves Like Alaska, Australia has far more gas than it can consume internally. A conservative estimate of 133 trillion cubic feet of proved reserves is 150 years worth of gas at Australia’s current domestic consumption, according to figures from the 2012 BP Statistical Review of World Energy.
Like Alaska, Australia’s oil and gas era started with discoveries in the 1950s and 1960s and saw rapid build-out through the 1970s. Like Alaska, oil was easier to bring to market than natural gas, with many remote gas discoveries stranded for decades.
Like Alaska, interest in natural gas development revived in the late 1990s and early 2000s in response to higher prices.
But here the paths diverge.
Australia eyed growing LNG demand, especially in East Asia, and launched a gas-drilling renaissance that discovered dozens of new fields. Big, deep-pocketed western oil companies got involved — Shell, Chevron, ConocoPhillips, ExxonMobil, Total. Gas and electric utilities in Japan and elsewhere joined in.
In some cases, projects won rapid-fire board of director approval. Developers of Pluto LNG in Northwest Australia, which started up this year, committed to the $15 billion project just two years after the field was discovered. For the $10 billion-plus Prelude project being developed entirely offshore, approval came a mere four years after finding the anchor gas field.
Big paydays Australia’s mad dash into LNG has come with growing pains.
Many projects are late. Some are over budget. Skilled labor shortages are acute as so many big-ticket projects compete for engineers and heavy-equipment operators.
The Pluto LNG plant opened this year 18 months behind schedule and cost $14.9 billion, compared with its original budget of $12 billion.
The Gladstone project expected to open in 2015 was recently repriced at $18.5 billion, up from $16 billion. The cost of the nearby Queensland Curtis project set to start up in 2014 recently grew to $20.4 billion from the $15 billion estimate only two years ago.
Aggravating and possibly helping to explain these challenges is that LNG isn’t Australia’s only export industry undergoing a growth spurt. Coal and iron-ore mining are much bigger industries in Australia than natural gas, and both are amid their own multibillion-dollar expansions, competing with LNG projects for labor and equipment.
A government official last fall noted the financial boon that’s blessed workers willing to relocate to far-flung job sites.
Alan Copeland of the Bureau of Resources and Energy Economics said a run-of-the-mill laborer on a remote LNG project is pulling in wages of $225,000 to $300,000 a year.
Some remote projects can entail housing thousands of workers in or near towns that previously boasted only a few hundred residents.
Environmental issues Environmental issues are popping up, too. A $40 billion to $50 billion possible development called Browse in Northwest Australia would pipe gas over 200 miles from the offshore gas and liquids fields to an LNG plant that would be built near an environmentally sensitive and culturally important site called James Price Point. Among the issues: Avoiding fossilized dinosaur footprints that track along the coastline. Some traditional landowners greeted with disdain a 2011 agreement with the Aboriginal group Goolarabooloo Jabirr Jabirr designed to help push the project ahead.
Disposal of carbon dioxide, a waste greenhouse gas produced with methane and gas liquids, is an issue for some projects, just as it will be when Alaska’s Prudhoe Bay gas reserves get developed. Sponsors of the $37 billion Gorgon project offshore Northwest Australia plan to reinject the CO2 and gave the project their OK only after the government accepted long-term liability for the carbon dioxide after it’s injected.
In the more thickly populated east, coal-bed methane — called coal-seam gas thereabouts — will fuel the three LNG projects under way.
But the astounding abundance of coal-bed gas — the government estimates 30 trillion cubic feet clustered in Queensland, more than the conventional-gas reserves at Alaska’s Prudhoe Bay — could boomerang on Australia’s ambitions to add even more LNG projects.
Coal-bed wells are more closely spaced and less productive than conventional-gas wells. More wells mean more water use during production. This has riled farmers, who object to the number of wells, the amount of water needed and wastewater disposal plans.
Others warn of disaster as more LNG tankers sail past the Great Barrier Reef en route between Gladstone, the east-coast port that will house all three coal-bed methane LNG plants under development, and customers in Japan, China and elsewhere in Asia.
Some expect a furor if east coast consumers get whacked with higher natural gas prices thanks to exports. LNG will be sold to Asian buyers paying oil-indexed prices, not the currently lower domestic gas prices in Australia. Will coal-bed methane producers start routing their gas to the highest bidder, inflating local prices?
Another problem is that coal-bed field development to support the three LNG projects is behind schedule. Thank Mother Nature in part for that. Construction started during two of Queensland’s wettest years in decades — 2010 and 2011. The ground was so sodden developers couldn’t access some top prospects.
Reuters recently noted the problems could delay or kill plans for more coal-bed methane LNG plants beyond the three under development today: “Patchy drilling results, rising costs and a world-wide glut of gas threaten to jeopardize what could amount to more than $60 billion of additional investment in liquefied natural gas (LNG) plants, based on current project costs, and leave an industry that would be just half the size its architects once envisaged.
“Instead of exporting 56 million tonnes (metric tons) of LNG a year, as originally planned, the industry may have to stop at 25 million tonnes — the capacity already being built on Australia’s northeast coast.”
One analyst told Reuters: “‘If you join up all these dots: rising costs, technical challenges, regulatory hurdles and pushback from competing communities ... then you have a very poor scenario there.’”
Seven plants in five years LNG plants under development • Australia Pacific - $20 billion; 415 billion cubic feet a year capacity
• Gladstone - $18.5 billion; 380 billion cubic feet a year capacity
• Gorgon - About $40 billion; 730 billion cubic feet a year capacity
• Ichthys - $34 billion; 410 billion cubic feet a year capacity
• Prelude - $10 billion-plus; 175 billion cubic feet a year capacity
• Queensland Curtis Island - $20 billion; 415 billion cubic feet a year capacity
• Wheatstone - $29 billion; 430 billion cubic feet a year capacity
Despite the challenges facing Australia’s LNG industry, seven new plants are forecast to be finished within five years.
These plants should have enough capacity to make 60 million metric tons of LNG annually — an average of 8 billion cubic feet of gas per day. That’s roughly three times more gas than a large project to process Alaska North Slope gas might export.
By comparison, Australia’s two existing plants ran full-throttle last year in making 19.5 million metric tons — 2.6 billion cubic feet a day on average. With the third plant — Pluto — now online, Australia’s capacity is about 24 million metric tons.
This new capacity under construction could roughly keep world LNG supply on pace with or ahead of expected demand growth through 2017, according to several analyses.
Beyond that, it’s a question mark whether Australia will surge past Qatar as the world’s biggest LNG supplier by expanding production beyond 2017. (The seven projects will bring Australia’s LNG capacity to roughly the same as Qatar’s.)
Australia will be a high-cost producer. Adding the cost of installing offshore fields and well as the LNG plants, Australia needs a high oil price to pay off the development costs. So far, oil-linked LNG prices have worked favorably for Australia.
But LNG plants in Alaska, the U.S. Gulf Coast or Canada might be more cost effective for serving the demand growth after 2017, according to one analysis. New discoveries off East Africa — totaling at least 100 trillion cubic feet of recoverable reserves — also could dash Australia’s post-2017 LNG expansion hopes.
For now, Australia is playing a strong hand:
•It’s rich in natural gas reserves.
•Developers face little risk the country will nationalize their gas fields or LNG plants.
•It’s near the big LNG markets of Japan, South Korea, Taiwan, China and India.
•The country welcomes foreign investment, as it’s demonstrated over the decades in its mining industry.
Beyond this, Australia has shown it can be relied on to deliver. It’s hard to overstate the value of reliability to LNG importers such as Japan, South Korea and Taiwan. They need gas for power production and they have virtually no gas fields of their own.
Since Australian LNG production began in 1989 it has built a reputation as a reliable supplier.
This is part 1 of a story; part 2 will appear in the Aug. 26 issue.
Editor’s note: This is a reprint from the Office of the Federal Coordinator, Alaska Natural Gas Transportation Projects, online at www.arcticgas.gov/australia-makes-bold-move-lng-supplier.
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