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Leading the world in LNG – An exclusive report by Anthony Fensom


Queensland’s $60 billion liquefied natural gas (LNG) industry received an early Christmas present in December 2014, with the arrival of a tanker to collect the state’s historic first LNG cargo. But amid changing market and political conditions, the “new Qatar” is keeping the champagne on ice as it moves toward the next phase of its growth.



“Exports are forecast to quadruple over the next few years, making Australia the world’s top producer by 2018 ahead of Qatar.”


 

On December 22, the Methane Rita Andrea arrived off the coast of Gladstone to await delivery of the first cargo from BG Group’s US$20 billion Queensland Curtis LNG project (QCLNG). Seven days later, BG confirmed that the world’s first LNG project supplied by coal seam gas (CSG) and Australia’s fourth operating LNG project had loaded its cargo.

After four years of development, BG’s interim executive chairman Andrew Gould was understandably jubilant, saying: “This is an immense achievement which demonstrates the company’s ability to deliver a highly complex LNG project. The start-up of QCLNG is testament to the hard work, skill and dedication of all our employees, partners and customers including the thousands of individuals who have been involved in physically building the plant. The ongoing support from both the State Government of Queensland and the local councils of our upstream region and in Gladstone has also been pivotal in this development.”

Sunrise-at-Saxon-Rig-187-in-Fairview-field,-two-hours'-drive-north-of-Roma_Source_SantosBG said its Curtis Island project would expand further with the start-up of the second processing train of LNG production due in the third quarter of 2015. At peak production, QCLNG would have an output of around 8 million tonnes of LNG per annum, it said.

Visiting the Port of Gladstone, then Queensland Treasurer Tim Nicholls declared the gas shipment a major milestone for the state’s economy.

“This vitally important first shipment signifies the start of the production phase for Queensland’s new LNG industry,” Nicholls said in a December 30 statement.

“It will have huge benefits for the state’s economy; boosting export income, creating ongoing jobs and at peak capacity approximately $500 million a year in royalties for Queensland…With total investment to date of about $60 billion in gas infrastructure, the LNG industry is set to become Queensland’s second-largest export industry, following coal.”

Nicholls said the emerging LNG sector would underpin Queensland’s projected economic growth of 5.75 per cent in fiscal 2016, a sharp rise from the 2.5 per cent forecast for fiscal 2015.

When Gladstone’s three major LNG export projects are completed and fully operational, the port would have a production capacity of 25.3 million tonnes per annum (mtpa), making the state one of the world’s biggest producers and exporters of low-emission gas to Asia.

But while BG won the race for first production, Gladstone’s other project proponents are not far behind.

In its January 23 quarterly report, Santos said its US$18.5 billion GLNG project, a joint venture between the Adelaide-based oil and gas company, South Korea’s Kogas, Malaysia’s Petronas and France’s Total, was on track for start-up “in the second half of this year.”

“Commissioning of the GLNG LNG plant is well underway, with firing of the first gas turbine generator expected in the coming weeks. GLNG is more than 90 per cent complete and it remains on time and on budget,” Santos chief executive David Knox said.

The project includes the development of CSG resources in Queensland’s Bowen and Surat Basins, construction of a 420-kilometre underground gas pipeline to Gladstone and two LNG trains with a combined capacity of 7.8 mtpa. According to Santos, the second train is expected to be ready for start-up by the end of 2015.

Meanwhile, the $24.7 billion Australia Pacific LNG (APLNG) project, a joint venture between Australia’s Origin Energy, U.S. giant ConocoPhillips and China’s Sinopec, is also picking up speed in the drive toward production.

On February 11, it announced a “significant milestone” with the arrival of first gas from CSG fields in the Surat Basin at its LNG facility on Curtis Island, also marking the completion of commissioning of its 530km gas pipeline and allowing it to initiate commissioning of its power generation facilities.

“The achievement of two major milestones, first gas to Curtis Island and completion of commissioning of the pipeline, demonstrates continued strong progress by Australia Pacific LNG and paves the way for the commissioning of the power generation facilities on the island,” APLNG chief executive Page Maxson said.

“Australia Pacific LNG looks forward to completing the final phase of construction and delivering first LNG in mid-2015,” he added.

Queensland’s new LNG projects, combined with another six planned projects nationwide, account for more than $180 billion worth of investment and are set to make Australia the world’s biggest exporter of LNG. Australia shipped nearly 24 million tonnes of LNG in fiscal 2014, earning $16.3 billion in export revenue, and this should rise to $17.6 billion in fiscal 2015 according to government forecaster BREE. Exports are forecast to quadruple over the next few years, making Australia the world’s top producer by 2018 ahead of Qatar.

“Extraordinary technology and the emergence of a burgeoning Asian market have allowed industry to produce and commercialise Queensland’s enormous gas reserves,” David Byers, chief executive of the Australian Petroleum Production and Exploration Association (APPEA), said in a January 6 statement.

“And because natural gas is a much cleaner-burning fuel than traditional energy sources, exporting gas to places such as China and India is among the most meaningful contributions Australia can make to reducing global greenhouse emissions.”

PRICE SLUMP
Yet despite the upbeat announcements, Queensland’s newest export industry has run into a storm of market and political uncertainty.

QCLNG’s start-up came amid a slump in Asian LNG prices, dampening the outlook for further investment and hitting projected government revenues. In December, average LNG prices in Japan, the world’s biggest gas market with a 37 per cent share in 2014, posted their largest fall since 2009 and analysts expect further price weakness in 2015 on the back of slumping oil prices.

Japan’s spot LNG prices closely track the Japanese crude import price, with a lag of around four to seven months, according to analysts.

According to researcher BMI, reduced demand from Japan has been exacerbated by a steep decline in LNG purchases by South Korea, the world’s second-biggest LNG consumer with 15 per cent market share in 2014.

In a February 16 report, BMI said it saw “significant headwinds against LNG prices in Asia for 2015: limited demand in the major demand markets in North East Asia, a weak oil price environment and an expected increase in supply to the market.”

“We do not expect a significant recovery in demand from Japan and South Korea in 2015,” it said, stating that a “well-stocked inventory would limit LNG import demand from Japan in face of relatively flat demand growth. In addition, we expect even weaker prospects for demand growth in South Korea, in face of weaker economic growth and a continued shift in the power sector towards nuclear and coal.”

Lower oil prices will encourage long-term LNG buyers to “take up LNG beyond their minimum obligations in take-or-pay agreements. This would increase supplies in the spot market, putting further downward pressure on LNG prices in Asia,” BMI said.

It noted that should Chevron’s Gorgon LNG project [in Western Australia] come online this year, it would add an extra 15.6 mtpa to the market, with Gorgon and the three Queensland projects collectively meeting up to 70 per cent of total Japanese demand in 2014.

Consultancy Energy Aspects has forecast a 35 per cent dive in Japanese LNG prices this year, with costs set to average below $10 per million British thermal units for the first time in four years as new projects in Australia and the United States lift supply, Bloomberg New Energy Finance said.


“In the last six months the world has changed in the oil industry.”


In a more positive sign for LNG exporters, lower spot prices are seen boosting demand from emerging economies in Asia, including Indonesia and India. In 2014, China, India and Southeast Asia accounted for around 15 per cent of global LNG demand, and are expected to be the “driving forces of incremental buying by 2020.”

Yet BG, Origin Energy and Santos have flagged cutbacks and posted lower profits due to falling energy prices.

In early February, BG wrote US$6.8 billion off the value of its QCLNG project, largely due to lower oil price forecasts, saying, “In the last six months the world has changed in the oil industry.” The company said QCLNG’s first train would reach full capacity in the June quarter, with the second beginning production in the third quarter and both up to full steam by mid-2016.

On February 19, Origin Energy reported a statutory loss of $25 million for the half year with profits from its oil and gas business diving by 31 per cent, although it said the economics of the APLNG project “remains robust.” Origin said APLNG was on track for sustained production from the first train in the first quarter of fiscal 2016, and from the second train in mid-fiscal 2016, with project costs in line with its budget.

Santos followed up by announcing on February 20 a $935 million full year net loss due to cheaper oil, with plans to axe more than 500 jobs. However, it said GLNG was still cash flow positive at oil prices as low as US$40 a barrel.

Westpac economists have forecast that lower oil prices could erase more than $30 billion in LNG export revenues in fiscal 2018, to $36 billion instead of the $67 billion previously estimated, although still representing a large increase from current revenues. It also said LNG prices would still remain around 30 per cent above the average of the past decade, with oil prices expected to recover along with demand.

ROYALTIES SLASHED
Meanwhile on the political front, the Queensland industry faces a new Labor government in 2015 which has inherited a very different fiscal climate to the one it had during the boom.

Queensland Treasury has slashed its projection for LNG royalties in fiscal 2015 to just $71 million compared to its earlier estimate of $200 million, due to production delays and lower export prices. It also cut its four-year royalties forecast by $300 million to $1.7 billion, making the gas boom less beneficial to Treasury’s coffers.

Amid resource industry concerns over potential policy changes, new Queensland Premier Annastacia Palaszczuk has pledged not to hike royalties for gas or other resources in her first budget.

Queensland Resources Council (QRC) chief executive Michael Roche told an industry dinner on February 19 that the industry welcomed the new government putting priority on jobs.

“Our new premier has made it clear that her top priority is job creation and with the resources sector responsible directly and indirectly for one in five jobs in Queensland, opportunity is knocking. Obviously, growing the resources sector is a means of increasing government revenues,” he said.

In fiscal 2014, Queensland’s gas industry directly contributed $13.2 billion to the state’s economy, employing 6,100 full-time workers and supporting more than 3,600 businesses, Roche said, including around a third of the Darling Downs economy.

He said the new government needed to address high input costs, reduce project delays and improve regulatory processes, including removing impediments to the exploration and extraction of CSG.

GAS SHORTFALL?
Credit Suisse has raised fresh concerns over the future of Queensland’s gas industry, with analyst Mark Samter suggesting the nation’s gas market was like a “slow train crash.”

According to the Swiss investment bank, the three Queensland LNG projects face a gas reserve deficit of nearly 9,000 petajoules (PJ) in meeting their 20-year sales contracts – an amount equivalent to 12 times Australia’s annual gas consumption, excluding Western Australia and the Northern Territory.

Samter said the Queensland projects would not cover their cost of capital, while gas users on the east coast would suffer a doubling of prices and could face difficulties obtaining gas by the end of the decade. He said the government could be forced to intervene to ensure the 9,500 PJ of gas reserves from Arrow Energy’s fields were developed to make up the shortfall.

“There’s a slow train crash happening and it doesn’t look like much is being done to resolve it,” he told the Sydney Morning Herald in a February 17 report.

However, APPEA’s Byers rejected the claim, saying the economics of the Queensland projects were “robust.”

“It is not the case that each joint venture requires all the gas to meet all 20 years of gas supply right now,” he added. “That’s like asking a shop that sells Coke to have 20 years’ worth of Coke on hand at any one time.”

Producers pointed to the spare capacity at the Bass Strait venture between ExxonMobil and BHP Billiton, as well as the Cooper Basin, along with other potential new sources of supply.

“There are significant gas reserves in Australia that enable us to meet the needs of both domestic and export markets,” an Origin spokeswoman said. “The priority is securing efficient and timely investment to develop and extract these reserves.”

A Shell spokesman said discussions on “collaboration opportunities” for the Arrow Energy gas were continuing, with the company examining the “best development option” for its CSG resources in the Bowen and Surat Basins.

The company jointly owned by Shell and PetroChina provides around 20 per cent of the state’s gas supply from its five producing CSG fields. Plans for its own US$20 billion LNG plant on Curtis Island have been shelved however, as previously flagged in Queensland Mining & Energy Bulletin.

LONGER-TERM OUTLOOK POSITIVE
Amid the immediate gloom over energy prices, analysts still see a rosy long-term future for Queensland’s new export industry.

“We know that construction spending phase is coming off its peak but we also expect that the CSG industry will continue spending around $4 billion a year on upstream operations and maintenance for the rest of this decade. And we are a long way off having the full time bell sound on how much gas we have in Queensland,” QRC’s Roche told the Australian Pipeline Industry dinner.

He also noted that the International Energy Agency has forecast that Australia’s gas exports could reach 114 billion cubic metres by 2040, with global demand for gas “set to grow more than any other fuel source.”

According to BG’s head of shipping and marketing, Steve Hill, growing Asian demand for gas should lead to a supply gap, despite the emergence of new LNG projects.

He told the Australian Financial Review that new projects in Australia and the United States would increase global capacity to about 350 mtpa by 2020, but demand in 2025 was forecast at more than 425 mtpa, even before the oil price slide.

“That’s a healthy hole that needs supply by new projects,” Hill said in the February 4 report. “And with the lower price environment we’re seeing today, we expect demand to do better over the long term.”

Stronger for longer? With the start of production, Queensland’s gas industry has already proved the doubters wrong. It likely will do so again.

Anthony-FensomPROFILE
ANTHONY FENSOM

Anthony Fensom is a communication consultant and freelance writer based in Brisbane, with more than a decade’s experience in the finance/media industries of Australia and Asia.

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