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LNG boom or bust for Australia as Ichthys moves forward

Inpex and Total are pushing ahead with Ichthys LNG. But can the country – and the market – sustain such ambitious development plans?

Australia is well on its way to becoming the world’s largest liquefied natural gas (LNG) producer following Inpex and Total’s approval of the A$34 billion ($35 billion) Ichthys development. The 8.4 million tonnes a year (t/y) export scheme will be Australia’s eighth LNG project and the second biggest resource project in the country’s history, after Chevron’s A$43 billion Gorgon LNG project.

The decision brings the sum of capital committed to new LNG projects in Australia to around A$180 billion and opens new development options for gas finds off the remote northwest coast, setting the Northern Territory capital of Darwin up as a hub for Browse basin discoveries. The official nod pits Darwin against the controversial James Price Point site on Western Australia’s Kimberley coast, chosen by Woodside as its preferred onshore site for its proposed Browse LNG plant.

Japanese firm Inpex will build an 850 km pipeline from the Browse basin, 200 km off northwest Australia, to Darwin. And the costly framework could help speed up the development of smaller fields, providing an easier path to commercialisation. The pipeline, which will be one of the world’s longest subsea links, includes tie-in points for other gas discoveries, improving the project economics for smaller fields.

And additional gas supplies could potentially see Ichthys LNG expand beyond its initial nameplate capacity. Following the final investment decision, the partners immediately raised the prospect of expansion. Inpex said that its onshore site has sufficient space for up to four more LNG trains, as well as the two planned under phase one.

Inpex and Total signed have secured sales agreements for the project’s entire production for 15 years from 2017. Taiwan’s CPC will take 1.75 million t/y, while Japan’s Chubu Electric Power and Toho Gas have committed to 490,000 t/y and 280,000 t/y, respectively. Inpex and Total themselves will offtake 1.8 million t/y. The project’s remaining 4m t/y has been bought by five large Japanese utilities — Tokyo Electric Power, Tokyo Gas, Kansai Electric Power, Osaka Gas, and Kyushu Electric.

As well as the LNG, Ichthys will pump an estimated 150,000 barrels a day (b/d) of liquids at peak production.

Despite only having two LNG projects producing nearly 20 million t/y, Australia is on track to overtake Qatar’s world-leading existing and committed capacity of around 77 million t/y. Energy minister Martin Ferguson predicts Ichthys will make Australia the world’s biggest LNG supplier by 2017 or 2018. And with sufficient planned projects on the table, Australia will likely hit 100 million t/y by 2020.

Last greenfield project?

But some believe Ichthys might be the last onshore greenfield LNG plant sanctioned in Australia. Analysts caution that the country’s high construction and labour costs, coupled with increasing competition from international LNG projects, mean other stand-alone projects, including Woodside’s Browse development, may never materialise.

It’s too early to say with any certainty whether the raft of planned international projects will prove cheaper than those in Australia, but the opening of Arctic sea routes and the widening of the Panama Canal will enable more Atlantic basin projects to sell into Asia, creating greater competition for Australia.

And recently, the chief executives of BP and ConocoPhillips, two of the largest oil producers in Alaska, said the only profitable way to develop the state’s vast North Slope gas reserves – pegged at about 54 trillion cubic feet (cf) – is to export them to the Asia-Pacific region.

Sydney-based Macquarie Equities energy analyst Adrian Wood is forecasting cost blowouts of 25-40% and schedule delays of several months for some Australian projects, saying greenfield projects have had their day as Australia prices itself out of the market. It is a contentious view, but it echoes growing concern among industry-watchers.

There is no doubt that Australian LNG schemes are expensive. But the creation of a string of greenfield hubs means subsequent brownfield projects should be more economically attractive, as long as the quality of the resource is maintained, said Craig McMahon, lead analyst Australasia for Wood Mackenzie.

The Western Australian government is effectively creating LNG precincts, which makes sense both environmentally and economically. And it is unlikely to approve additional sites beyond those already sanctioned – the North West Shelf, Burrup peninsula, Barrow Island, Ashburton North and James Price Point. After James Price Point, which will have capacity to develop future Browse basin gas finds, the government of Western Australia said it will not sanction any more hubs.

As LNG is sold on a market-netback rather than cost-plus basis, the challenge for Australia is whether higher-cost schemes will deliver an acceptable rate of returns to sponsors.

Oil-price indexation for LNG volumes is under pressure compared with 12-24 months ago, but sales contracts take into account many factors, including quantity tolerances, destination flexibility and upstream equity. In addition, with many contracts utilising S-curves, developers are to a degree protected against their project costs, John Harris, director of global gas for IHS Cera, told Petroleum Economist.

Credibility on the line

Tony Regan, principal consultant at Singapore-based Tri-Zen International, claimed Ichthys will not be the last stand-alone project, if only because a Shell-PetroChina joint venture is unlikely to pull the plug on its proposed coal-bed methane-to-LNG (CBM-LNG) plant at Gladstone, in the eastern state of Queensland.

Crucially, there is far too much credibility at stake. The supermajor’s maiden partnership with state-owned PetroChina can hardly be seen to fail. And, significantly, there is no pressure for the venture to find customers, as the Chinese national oil company will need much of the plant’s output to meet expanding domestic demand. But the same cannot be said about environmental approvals, as the storm clouds gather over CBM development in Queensland and New South Wales.

Elsewhere, Woodside will have huge credibility problems if it doesn’t push ahead with the 8.6 million t/y Pluto expansion and continue to promote the proposed 4 million t/y Greater Sunrise venture.

But Regan conceded that the industry is at a watershed. Ichthys will be the last of a raft of developments that included Chevron’s Gorgon and Wheatstone schemes, Shell’s floating LNG (FLNG) project, aptly named Prelude, as well as three CBM-LNG plants at Gladstone.

The general consensus is that the next round will be tougher. Australian developments face vastly more competition than they did only a year ago, as the project pipeline has been flooded with proposals. And Australia’s projects will continue to be dogged by rising costs and delays.

According to Tri-Zen, final investment decisions for 37 LNG developments are due within the next three years, with a combined new capacity of 235 million t/y – more than global production in 2010. Of course, not all will go ahead, but many have sound fundamentals.

And with mounting competition for Asian LNG-supply deals emerging from the US Gulf coast, Canada, Russia and even east Africa, it is crunch time – especially for Woodside’s Browse plant, which has already slipped down the development queue. In December, Woodside said it may need to delay the final investment decision on the project by nearly a year to the first half 2013. It has not released a project-cost estimate, but Deutsche Bank estimates around A$38 billion would be required for the 12 million t/y plant.

Weighing the risks

Browse has been hampered by land and environmental issues and appears vulnerable because of a lack of shareholder alignment. Woodside owns 50% of Browse, which is estimated to hold about 13.3 trillion cf of gas, alongside partners BP, Chevron, BHP Billiton and Shell.

Woodside has faced local opposition to its preferred plant site at James Price Point, while its partners have suggested another location, such as the existing 16.3 million t/y North West Shelf plant further south, may be more suitable. But the federal government is eager to see Browse developed as soon as possible and the conditions of the lease restrict the project site to James Price Point. The government of Western Australia is also keen to see development in the remote Kimberley region, especially because of the employment opportunities it will create.

But finding customer support for Browse could prove difficult, as rival overseas suppliers materialise. And without buyers, sponsors are unlikely to have the appetite to build the project speculatively.

On a more positive note, however, IHS Cera’s Harris predicted LNG demand will continue to grow and more projects will be able to secure buyers. China’s thirst for gas will not diminish anytime soon and its push for domestic unconventional-gas production remains some way off. And there are many emerging Asian buyers of LNG, adding to the future demand slate.

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