Queensland’s gas prince eyes off challengers

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Queensland’s gas industry is set for further gains in 2013, as the $60billion industry moves to become the state’s second-largest behind coal, writes Anthony Fensom.

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Queensland’s gas boom is set for further gains in 2013, as the $60 billion industry moves to become the state’s second-largest behind coal. After a year of mixed fortunes for the industry, including regulatory changes, rising cost pressures, economic and market volatility and environmental issues, proponents and not least the Queensland government are hopeful of continued growth.

The Queensland government is keenly anticipating the forecast $850 million a year in royalties from the Gladstone liquefied natural gas (LNG) projects, which will convert coal seam gas (CSG) to LNG for export to Asia.

The resource-hungry region is expected to account for 62 per cent of the growth in demand for LNG by 2020, making it an obvious customer for Australia’s burgeoning export industry.

According to a recent Deloitte Access Economics report, Australia is on track to become the world’s second-largest exporter of LNG, currently hosting eight of the 14 plants under construction or committed to around the world.

Queensland’s CSG industry is also a growing source of jobs, employing more than 18,500 workers as of September 2012, according to the Australian Petroleum Production and Exploration Association (APPEA).

However, APPEA has warned against complacency, saying that the nation’s high-cost environment and the emergence of new LNG competitors overseas would make it more difficult to win market share and attract investment.

Regulatory changes continue

For its part, the Queensland government has been anxious to show its support for CSG amid a downturn in the state’s coal industry by moving to ease regulatory processes and encourage greater cooperation between landholders and companies.

After launching the Gasfields Commission in April 2012 with representatives from industry, landholders and the community, the Queensland government announced legislation in November formalising the powers of the new body.

Comprising chairman John Cotter and six commissioners, the statutory authority is entrusted with improving “co-existence between resource companies, landholders and communities,” according to a November 27 statement.

“The coal seam gas to liquefied natural gas (CSG-LNG) industry will inject almost $60 billion into the Queensland economy. These projects are expected to create more than 18,000 jobs and leave a legacy of skilled workers for new mining and other projects in the future,” Deputy Premier Jeff Seeney said.

“There are currently more than 8,400 people working on LNG facilities on Curtis Island with more than 88 per cent of these workers being from Queensland. While this industry is pumping billions of dollars into the local economy and will generate significant royalty revenue, it must co-exist with the agricultural sector and better work with the rural landholders and regional communities that we depend on for food and fibre.”

The legislation also covered the establishment of the Gasfields Community Leaders’ Council, a group comprising representatives from the agricultural and CSG industries along with community groups and government.

The government has also announced moves to improve regulatory processes under its Streamlining Bill and new regulations on the treatment of CSG water, as well as establishing in September a revamped Department of Environment and Heritage Protection.

According to Tarnya Fitzgibbon, partner at Cooper Grace Ward, farmers had welcomed the establishment of the Gasfields Commission, in addition to the move to make compensation agreements between gas companies and landholders more transparent.

“Previously every conduct and compensation agreement had a confidentiality clause, and that’s now been removed. While some of my clients have good neighbours and they’ll talk about their agreements and any special conditions, others don’t want to talk to their neighbours so there’s no way of finding out what the baseline compensation is,” she said.

However, the government’s move to introduce competitive cash bidding for coal, petroleum and gas resources has sparked concerns that smaller companies may be squeezed out of the industry.

In October, natural resources minister Andrew Cripps announced the first tenders under the new system, which aims to discourage exploration permits being “warehoused” and of maximising the value of the resources. For explorers, non-cash releases in “greenfield and under-explored areas” would continue, he stated.

APPEA chief executive David Byers criticised the move, saying the government risked future exploration gains.

“Cash bid payments reduce the overall pool of funds available for companies to undertake exploration because they divert funds from the drilling of wells to the payment of government access charges,” he told EnergyNewsBulletin.

“Many of these companies have been directly responsible for identifying the resource potential of regions and basins that are now producing oil and gas in Australia,” he added.

According to Fitzgibbon, the move might encourage junior explorers to “form joint ventures or other structures to become competitive in their bids,” given the competition from larger companies with greater resources.

The federal government subsequently announced in November plans for the introduction of its own cash bidding system for offshore petroleum exploration tenements, although applying only to “mature areas, or those known to contain petroleum accumulations.”

Gas reservation debate

A growing debate between gas consumers and producers over future supply has intensified following September’s launch of the Queensland government’s gas market review.

In a September 27 statement, energy minister Mark McArdle noted concerns by “some major domestic gas users” regarding affordability and security of supply over medium and long-term contracts.

“While our state’s growing gas supply industry will underpin strong economic growth in national and international gas export markets, a secure, accessible and reliable domestic gas supply is a key ingredient in supporting wider Queensland growth,” he said.

He also pointed to comments by APPEA that the industry body would “continue to play a co-ordinating role in the event that a major gas user claims difficultly in sourcing offers for supply”.

With speculation that domestic gas prices could triple to match the higher prices on offer for export gas, a review conducted by consultancy AEC on behalf of industrial gas consumers argued they contributed more economic value than the LNG industry.

According to the report, the industrial gas-using sector including such companies as Incitec Pivot, Queensland Alumina and Xstrata contributed $13.7 billion a year to gross state product, as well as directly and indirectly supporting 52,000 jobs.

However, APPEA has criticised gas reservation policies as impairing and not improving local gas supply and affordability, by deterring investment.

“Australia’s LNG sector is currently investing $175 billion in new projects and the sector created more than 100,000 Australian jobs this year. The Australians employed and businesses that have benefited from the growth of the LNG industry would seem to tell a different story to the picture of gloom portrayed…by representatives of the big gas buyers,” it said in a statement.

Cooper Grace Ward’s Fitzgibbon said any move to reserve gas for domestic use could be both politically and legally risky.

“At present most of the gas is being extracted subject to contract for export, so by the government reserving supplies it would result in an under-supply and an inability of the exporters to meet their supply obligations…it’s fraught with danger and would put Queensland’s and Australia’s reputation at risk,” she said.

Project push

The CSG-LNG projects planned for Gladstone have continued to pick up steam, even amid concerns over cost blowouts and increased competition in international gas markets, from both new producers and potentially other gas sources.

The Queensland port city is currently host to three projects under construction, comprising the US$20 billion Queensland Curtis LNG Project (QCLNG) owned by Britain’s BG Group; Santos’s $19 billion Gladstone LNG (GLNG) development; and the US$23 billion Origin Energy/ConocoPhillips Australia Pacific LNG (APLNG) facility.

A fourth project, Arrow LNG planned by Royal Dutch Shell and PetroChina is awaiting final investment decision in late 2013, amid speculation that the project partners may be seeking to form a tie-up with one of the three Gladstone projects already underway.

In addition, plans by LNG Ltd for its own Fisherman’s Landing project remain up in the air, after its reported takeover bid for CSG explorer WestSide failed to materialise. WestSide has since been the target of another offer from a rival company, with speculation that the bidder might be PetroChina seeking to increase supplies for its project.

QCLNG expects to produce its first LNG within two years, stating in November that it had already spent some $400 million in the Western Downs region between Toowoomba and Roma. BG Group also announced the same month a 20-year, 5 million tonnes per annum (mtpa) LNG supply deal with China National Offshore Oil Corporation, effectively making the British gas giant the largest supplier of LNG to China.

Concerning APLNG, Origin announced its final investment decision (FID) in July, some 18 months after FIDs were announced on the rival GLNG and QCLNG projects. Analysts at Macquarie Private Wealth said its “slow and steady” approach was positive, however, noting recently that it already had over 20 per cent of the gas supply needed to feed two LNG trains.

Concerns over cost blowouts have increased after Exxon Mobil announced a US$19 billion increase in costs for its PNG LNG project, with Chevron also reporting a 21 per cent increase for its Gorgon LNG project in Western Australia.

Both QCLNG and GLNG have reported cost overruns at their projects, with the total recent blowout amounting to $16 billion at new greenfield LNG projects being built in Australia, including Pluto in Western Australia.

According to John Hirjee, senior energy analyst at Deutsche Bank, Australia has become the most expensive place for LNG in the world.

“We have a high Australian dollar to contend with, we have the high cost of labour, high material costs and high construction costs,” Shell Australia chairperson Ann Pickard was quoted saying by EnergyNewsBulletin at a Perth conference.
“If we can’t keep the costs down and find a way to improve productivity, onshore LNG plants will become increasingly difficult to build.”

Santos chief executive David Knox has urged greater collaboration among project proponents to reduce costs, although analysts have noted that projects “don’t go ahead unless they’re sold first”.

The company brought forward $2.4 billion of expenditure to ramp up CSG drilling for GLNG, as well as securing third-party gas from Origin Energy to boost supply.

There have also been concerns from analysts about whether the three projects under development will secure sufficient gas to meet contracted volumes, with speculation that shale gas from the Cooper Basin might also be tapped.

‘Shale gale’

While natural gas has been forecast by ExxonMobil to become the world’s second-biggest energy source behind coal by 2040, a shale gas revolution in the United States threatens to challenge global energy markets.

The so-called ‘shale gale’ in the United States has made it the leader in gas resources, displacing coal in power generation and freeing supplies for potential export to Europe as well as Asia.

In addition, China is reportedly home to the world’s largest untapped shale gas resources, equivalent to about 200 years of current consumption from all gas sources.

US gas exports are expected to commence in 2015, shortly after the 2014 launch of first exports from the Queensland LNG projects. While Japan is expected to import more gas than Qatar by 2018, the Japanese are reportedly seeking cheaper shale gas from North America.

Australia’s push to displace Qatar as the world’s biggest supplier of LNG by the end of the decade could yet be stymied by new exports from North America and East Africa, according to analysts.

The total amount of gas to be produced annually by the three major Queensland projects will be almost double the entire current demand from the eastern seaboard, making export demand crucial.

“King coal” may still rule in Queensland, but the “gas prince” is rapidly becoming more prominent, supplying 90 per cent of the state’s gas needs.

APPEA has urged a number of policy changes to ensure gas fulfils its promise, including taxation reform, improved energy markets, reduction of red and green tape, improved labour productivity and better fiscal and licensing terms for exploration.

“A wide-ranging reform agenda must be developed and implemented if the wealth generation potential of Australia’s oil and gas resources is to be fully realised,” APPEA’s Byers said in a statement.

For a state with its future tied to gas, both policymakers and the industry have a challenge to ensure that Queensland’s new prince does not become a pauper.

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