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Australia's gas race has begun

Three potential LNG projects are competing to fill eastern Australia's gas-demand supply gap

Western Port in the Mornington Peninsula is an unlikely spot for a transformational liquefied natural gas facility which could prise open eastern Australia's notoriously opaque, illiquid and under-regulated gas market. So is the fact that Australia—soon to become the world's largest LNG exporter—is even considering importing gas.

Beach shacks line the sleepy, tree-fringed lanes which back onto scrub and a network of sandy paths down to the placid, muddy waters of Western Port Bay. It's the kind of place where holidaymakers from Melbourne come to do some crabbing or park up their caravan during the school holidays.

For locals, the area is a low-key urban enclave where tired 1950s weatherboard bungalows give way to a jumble of low-rise industrial facilities supporting the cosmopolitan needs of the Victorian capital.

It's here, at Crib Point, that gas and power utility AGL is proposing to spend $197m upgrading ageing jetty infrastructure to import 100 petajoules a year (2.39m tonnes a year) of LNG from 2020-21. It will be brought in via a floating storage regasification unitan increasingly popular way internationally of accessing LNG quickly, cheaply and flexibly when smaller, seasonal volumes are required, or supply is constrained.

Analysts say cargoes for the AGL's FSRU project could come from elsewhere in Australia or further afield. "About 15 years ago, long before LNG was even a thought bubble, there was a proposal to pipe PNG [piped natural gas] via a lengthy pipeline to Gladstone. Now the irony is you could potentially get PNG into the east coast of Australia via LNG," says Deutsche Bank analyst John Hirjee.

For its part, AGL is keeping its choices open. "We have the option of sourcing LNG domestically, from Western Australia and the Northern Territory, and internationally," an AGL spokesperson told Petroleum Economist, adding that supply will be made available to "AGL customers and the market more generally".

Crib Point will be used with AGL's onshore, underground storage capacity at Newcastle and Iona in Victoria and Silver Springs in Queensland to enable the utility to 'swing' between storage and supply during demand cycles. This will be a largely new development for Australia which has never much used storage to manage supply and demand fluctuations.

Perfect storm

AGL's import plan will add a new and important dimension to eastern Australia's gas market. This is set to face supply shortages between 2018 and 2024 and again from 2030, according to the Australian Energy Market Operator (AEMO).

Constrained supply and rising prices have been a headache for generators such as AGL, as well as retailers, industrial consumers and federal and state governments ever since Queensland's three large LNG export projects were sanctioned from 2010.

Problems have been building in recent years as tumbling oil prices caused local producers to cut back on exploration spending; and some states introduced bans on fracking of unconventional onshore gas. It was compounded when Santos, operator of the Gladstone LNG export facility, started buying gas from third parties in the local market to feed its second train, rather than spend on costly, onshore coal-seam gas exploration.

Matters came to a head in mid-2016 when wholesale gas prices in eastern Australia's short-term trading market spiked at up to A$29 ($20.8) per gigajoule on cold winter temperatures. This was well above the A$9/GJ equivalent Japan was paying for imported LNG, some of which is sourced from Queensland exporters.

In response, former Prime Minister Malcolm Turnbull introduced an emergency gas reservation mechanism to claw back gas destined for export during times of high domestic demand. But the supply problemsand rising priceshaven't gone away. Industrial consumers in eastern Australia continue to complain of unpredictable, rising fuel costs and difficulties in securing long-term gas offtake contracts.

Competing concepts

For this reason, AGL's import concept isn't the only one on the drawing board. Three others have been mooted since AGL unveiled its plans in mid-2017, two underwritten by Japanese trading houses looking to offload excess contracted LNG.

ExxonMobil says it's "actively considering" a potential import project at an as-yet-unspecified location in Victoria. This would help it offset falling production from depleting fields operated by its 50-year-old Gippsland Basin joint venture with BHP in the Bass Strait. Imported LNG would be readily available from Exxon's 25% stake in the Chevron-led Gorgon export project in Western Australia, from which it has recently been marketing individual cargoes of LNG.

Just south of Sydney, in Wollongong's industrial zone of Port Kembla in New South Wales, the Australian Industrial Energy (AIE) joint venture is also developing an FSRU import point to bring in gas for industrial consumers. Set up by billionaire Andrew Forrest's Squadron Energy with Japan's Marubeni and the Tepco/Chubu Electric joint-venture firm Jera, the JV is aiming for a final investment decision in 2019 and first gas by early 2020, potentially pipping AGL's plans at the post.

"Our project is targeting large industrials within NSW [New South Wales] who have been poorly served by the incumbents. We're a new entrant looking to shake things up," Stuart Johnston, Squadron Energy's chief executive told Petroleum Economist.

"We're a single asset company offering transparent end-to-end pricing. That may not be the price that people have paid historically for gas but we're certainly getting a good reaction from potential customers because it is a very simple concept. We're not looking to optimise or swap which some of the incumbents are. It's a very different proposition from AGL's project in the Victorian market," Johnston added.

What AIE has which Johnston says "de-risks so much of the project" is access and the ability through JERA "to tap into one of the more sophisticated global buyers of LNG with a relationship with every single supplier on the planet".

The involvement of Tepco and Chubu's Jera gives AIE access to supply from Gorgon, Ichthys and Darwin in which the Japanese utilities have offtake rights. But Jera will also be sourcing gas further afield.

"Jera are an equity participant in the project itself, not just the LNG supplier, so we have an ability to buy from their portfolio but we also want to talk directly to new suppliers which we'll be doing together with Jera. Whether it's from Western Australia, the US, elsewhere in Asia or traders we will talk to all customers," says AIE's CEO James Baulderstone.

Market lure

Meanwhile, in South Australia, the Venice Energy JV set up by ex-BHP executives and IG Partners is looking at installing an FSRU at Pelican Point in Adelaide's Outer Harbour. Japan's Mitsubishi is a front-runner to supply the project with gas via its MIMI JV with Mitsui in Western Australia's North West Shelf

Up to one cargo a month of LNGequal to nearly 1m tonnes a yearwould be imported to fire a new 500-megawatt gas-fired power station at Pelican Point. A further two cargoes a month could feed into South Australia's gas network which sits at the end of eastern Australia's interconnected system and is exposed to supply fluctuations. Venice Energy is aiming to begin first imports through Pelican Point in 2021.

"We're in discussions with a range of potential suppliers at the moment, all of whom would like to do it," Kym Winter-Dewhirst, Managing Partner at IG Partners, told Petroleum Economist. This includes "well-established LNG trading houses" who are looking "to bring gas into the project and then move that into the market to take control of the retail end".

The Outer Harbour project has been in development since mid-2016 with an FSRU concept preferred because "it's relatively quick to execute and a more cost-effective proposal for a greenfield site than building onshore storage which is up to 60% more expensive," adds Winter-Dewhirst.

Exporter turned importer

The LNG import concept is a strange one for Australia which is awash with conventional and unconventional gas, both onshore and offshore. But the profit margins are attracting the attention of LNG traders, who see it as a high-value, low-risk market.

"We've been bowled over by the amount of interest. Many FSRU-related projects are in emerging economies and there is quite a high risk when you look through the lens in terms of quality of the underlying off-taker," says Squadron's Johnston.

"What we've found when talking to suppliers on the LNG and vessel side of things is that access to a world class OECD market like Australia with investment-grade-rated companies, big industrials and retailers, is something they're very interested in. It's a high-quality off-take, it's not huge but it is material. We're seeing a lot of appetite to invest in Australia right the way through the value chain," Johnston adds.

Source: Petroleum Economist

Despite the optimism, some analysts believe there may be room in the market for only one LNG import project and that there is an unofficial race of sorts under way between the developers to be the first up and running.

David Leitch of consultants ITK believes eastern Australia's small gas supply-demand gap means "there is no room for more than one LNG import proposal" there and that of the three, AGL's is most likely to go ahead.

The other two face "lots of competing proposals" which could make better sense. These include a host of new renewable and gas-fired generation proposals which could knock the LNG-to-power projects out of the market before they begin.

There's also the rising risk that tougher new gas reservation policies will be introduced if a Labour government wins the next general election. This could make it challenging for any LNG import concept to get off the ground and may mean residents of Western Port will not end up seeing a 270-metre FSRU as they look up from their beach picnics.

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