Analysis: Australia to Continue as Major LNG Source despite Slowdown
The rush in recent years to develop liquefied natural gas (LNG) projects in Australia has slowed down as LNG supply has caught up with demand. However, Australia will remain a main source of LNG, although the LNG projects proposed for construction will likely be built on a different timescale than originally proposed, said Zach Allen, editor and publisher of NATS Service.
The slowdown is not necessarily a bad sign for LNG project developers, unlike two years ago, when the rush to develop LNG projects meant the Australian government had project developers over the barrel. "Developers are not quite so desperate now to develop projects," said Allen. Developers also now have the advantage of lower material costs and more engineering services available as the cost pressures that were driving up overall project costs have eased.
Australian companies got an early foot into the potential LNG market in China, and will sell gas from new LNG developments to the emerging markets of China and India. Australian companies will likely continue to pursue its long-term contract strategy for LNG supply, Allen noted.
Shell's recent sale of its interest in Woodside could be a sign of Shell redeploying its assets, as the company is already exposed heavily to Australia's LNG market. Shell has its own floating LNG project on the drawing board with its agreement with Technip and Samsung to design, construct and install multiple floating LNG facilities over a 15-year period; the first vessels will be used to develop the Prelude and Concerto gas discoveries offshore Australia. Shell's floating LNG Prelude project recently received environmental approval from the Australian Minister of Environment Tony Bennett.
Asian LNG demand will be able to accommodate a good portion of the LNG supply expected to come online; however, some projects will likely end up being postponed. A number of projects that have gas sales and purchase agreements in place and have reached a final investment decision, including Gorgon Trains 1,2, and 3, Queensland Curtis, Wheatstone 1 and Gladstone 1, said Thomas Grieder, analyst with IHS Global Insight.
"Shell and PetroChina's planned LNG terminal on Curtis Island is also likely to sell into the Chinese market as well as to the domestic power sector and has a good reserve base following the acquisition of Arrow Energy's acreage, so I expect that to go forward too," said Grieder.
However, prospects are less rosy for other projects such as Origin Energy's Australian Pacific LNG project, which reportedly is having problems securing buyers despite having a large reserve base. "I wouldn't be surprised if Origin and ConocoPhillips are on the look-out for consolidation opportunities with other projects in the Gladstone area," said Grieder.
The selection of the floating development option for the Sunrise LNG project has become a major thorn of contention with East Timor, which is holding the project up, while Woodside's Browse Basin project had a supply contract cancelled by PetroChina and is running into land acquisition issues.
"Looking forward, I think that a few planned future expansion projects for LNG terminals from 2015 might have to be delayed until extra re-gasification capacity is constructed in Asia," said Grieder.
CBM-to-LNG projects may face some profits tax increases, but they will likely not be too serious, Grieder said, adding that Shell's sale of its stake in Woodside is not a sign of Shell's lack of confidence in Woodside, but of Shell's own strategy to pay down debt, simplify the company structure and improve capital efficiency. Shell wants to invest directly in assets, not just through Woodside.
Australia's LNG production capacity is set to increase from 19.5 million tones per annum (mtpa) this year to 38.8 mtpa from 2014, according to the Australian Petroleum Production and Exploration Association (APPEA) in its State of the Industry 2010 report. However, reduced demand growth for gas for industrial use due to the global economic recession, coupled with increases in unconventional gas production and LNG facilities, has resulted in a slowdown in the development if Australian LNG projects.
According to APPEA, most of the projects are targeting a final investment decision, which marks the beginning of construction, this year or in 2011 with first gas production during 2013-2016. "However, it is far from certain that any of these projects will proceed within the timetables being proposed. Access to markets and finance will be key determinants, both of which have become more difficult as a result of the global financial crisis, slowdown in global economic growth and changes in some of the world's largest markets."
"Projects are also likely to face increasing cost pressures as skilled labor shortages again re-emerge and as construction activity in this and other industries increases," APPEA said, noting that finding sufficient gas customers to sign the long-term gas supply contracts needed to underwrite high-cost LNG projects is set to become increasingly difficult, as the world currently has a glut of gas which will take time to eliminate.
The global gas glut has resulted from the boom in unconventional gas production in the U.S. and Canada since 2006; this gas glut, along with the growing LNG supply base with global capacity increasing by 49 mtpa in 2009 and another 11 mtpa in early 2010, has put downward pressure on prices. Global LNG production capacity is expected to rise to 299 mtpa in 2013, a more than 50 percent increase on capacity at the end of 2008, as LNG suppliers such as Qatar and other countries expand their LNG businesses. Qatar in particular is a threat to Australia's LNG growth aspirations has it has larger gas resources and low costs than Australia, as well as flexibility to redirect cargoes.
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