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Australian LNG projects scramble for CBM resources

The race is on to be Australia’s first CBM-LNG exporter, but an obstacle has been dropped on the course

In the five-horse race to export Australia’s unconventional gas to Asia’s thirsty energy markets, one runner is trailing the field and another could be a non-starter because of gas-supply problems.

US supermajor ConocoPhillips and its Australian partner Origin Energy have reached a final investment decision (FID) to build what could be the country’s largest coal-bed methane (CBM) to liquefied natural gas (LNG) development.

Australian Pacific LNG (APLNG) is now competing with rival projects lead by BG Group and Santos that have already reached FID. It leaves the Shell-PetroChina joint venture, Arrow LNG, lagging behind in a fiercely competitive field, while Australia’s LNG Limited is struggling out of the blocks, as it searches for gas supply for its Fisherman’s Landing project.

BG’s Queensland Curtis LNG (QCLNG) is targeting its first cargo in 2014. APLNG and Santos’ Gladstone LNG (GLNG) are both aiming for 2015. Meanwhile, Arrow LNG has its first cargo scheduled for 2017, with FID not expected until late 2013. Fisherman’s Landing expects first LNG in 2014, but is also yet to reach FID.

The four larger projects aim to tap the substantial CBM reserves trapped in Queensland state’s rich coal seams. The feedstock CBM (referred to locally as coal-seam gas), will be drawn from the Surat and Bowen basins, which together hold an estimated 24 trillion cubic feet (cf) of resources, according to the Australian government.

Enough gas to go around?

But there are concerns that the CBM-LNG export projects are generally short of reserves. “Given the number and scale of the Queensland CBM-LNG projects, one could speculate that they do not yet have sufficient gas reserves for the whole length of those projects,” said Paul Rheinberg, senior manager with Deloitte Petroleum Services.

Indeed, a senior director with a Queensland-based CBM company told Petroleum Economist that there is not enough gas to go around. He said that, at this point, the resources in the ground do not convert to cargoes. “It’s pretty clear that Santos’ move for Eastern Star Gas was a strategic bid to firm up more reserves for its CBM-LNG export project.”

Fisherman’s Landing was also supposed to receive Queensland CBM from Arrow, but the arrangement was scrapped when Arrow was acquired by the Shell-PetroChina joint venture.

LNG Limited has now turned to other CBM developers, including Metgasco in northern New South Wales (NSW), to secure alternative gas supplies. But although Metgasco has a large resource base, LNG Limited faces competition from other LNG developers and domestic gas customers.

“The company’s resource base is comfortably capable of supplying the gas needs of at least half of a 4m tonnes a year (t/y) LNG plant. Large LNG industry players and regional gas buyers continue to beat a path to Metgasco’s door, seeking to acquire an interest in its resources,” says Australian financial firm EL&C Baillieu. It estimates Metgasco’s recoverable resources at 10.4 trillion cf.

The expansion in CBM-LNG production capacity could spark a scramble for gas resources, meaning Metgasco will be courted by a number of attractive suitors. “LNG-project developers will begin chasing new reserves to feed second and third trains, which increase rates of return,” says Baillieu. “Metgasco will receive overtures from big gas buyers this year – small CBM developers are already reporting heightened levels of requests, from multiple parties, to negotiate supplies.”

Meanwhile, Metgasco has said it is considering a further two, unnamed LNG projects: one based in the Port of Brisbane and a floating LNG project off the coast of NSW. “[A] study found that all three options were economically attractive,” the company says.

Unlike the other CBM-LNG projects, Fisherman’s Landing is yet to secure buyers for its 3 million t/y of production and its largest shareholder – China Huanqiu Contracting & Engineering – is not a big LNG buyer. Somewhat optimistically, LNG Limited expects the first 1.5 million t/y train to be operational in 2014 and the second in 2015.

Latest ConocoPhillips FID

ConocoPhillips’s FID covers the $14 billion first train at the two-train, 9 million t/y APLNG project. Building the second train, which could be operational by early 2016, would push costs to $20 billion – and FID on phase-two is not far off. ConocoPhillips and Origin each hold 42.5% of APLNG, while China’s Sinopec has a 15% interest. State-owned Sinopec will offtake 4.3 million t/y from the first train.

"The capital expenditure committed at this stage includes some provision for a second train and points to a strong degree of confidence that Origin and ConocoPhillips are close to announcing further sales agreements. This as a positive indicator for a two-train project," said Craig McMahon, senior Australasia analyst with Wood Mackenzie.

Origin managing director Grant King said LNG offtake discussions for the second train’s LNG output were “well advanced”, but did not name a buyer.

Other CBM-LNG projects

Other CBM-LNG runners have also underpinned projects with long-term supply contracts to Asian buyers. BG subsidiary QCG has signed a number of LNG-supply agreements, including a 3.6 million t/y deal with China’s CNOOC over 20 years from the start-up of QCLNG; a 122-cargo deal, over 21 years, with Japanese utility Chubu Electric, starting in 2014; and a 20-year 1.2 million t/y deal with Tokyo Gas from 2015. QCLNG made its FID on the $15 billion, 8.5 million t/y QCLNG project in December.

Santos-led GLNG has secured supply deals with Malaysia’s Petronas and South Korea’s Kogas for a combined 7 million t/y. FID was reached in January, and the two-train, 7.8 million t/y project is expected to cost $16 billion. Santos has a 30% interest, with Petronas and Total holding 27.5% each, and Kogas the remaining 15%.

Lagging behind, but with a large buyer as a partner, Arrow LNG could produce up to 16 million t/y from four production trains. First LNG is expected in 2017 from two trains, each producing around 4m t/y. The remaining capacity expansion, which remains clouded in doubt, would not come on line before 2020.

But Shell is in no rush to develop its joint venture with PetroChina, believing costs will decline when the rush of LNG construction in Queensland subsides, said chief executive Peter Voser last week. A later start to construction of would mean less competition for skilled labour and an opportunity to co-operate with the other projects, says Andrew Faulkner, chief executive of Brisbane-based Arrow. Arrow has long maintained it is not in a race to FID, instead opting to take its time.

And while CBM-LNG producers are in a race with each other, they are also competing with Australia’s other LNG megaprojects due to start up in the next five years. These include Chevron’s huge 15 million t/y Gorgon and 8.6 million t/y Wheatstone projects, which have already sunk their claws into the lucrative Asian LNG market, as Australia vies with Qatar to become the world's largest LNG supplier.

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