Asia in Stake-Splash for LNG Projects Down Under

Asia in Stake-Splash for LNG Projects Down Under

With seven world-scale LNG projects that have already reached their final investment decision stage, Australia is fast becoming a country that is poised to overtake Qatar as the largest liquefied natural gas (LNG) exporter by 2020. Northeast Asian and Southeast Asian countries with deep pockets are keeping their eyes on investment opportunities abounding Down Under.

Four of the new projects draw from gas fields in Western Australia: Gorgon, Prelude, Wheatstone and Ichthys. The other three are in Queensland: Queensland Curtis LNG (QCLNG), Gladstone LNG (GLNG) and Australia Pacific LNG (APLNG). In the LNG sector, no other country has undertaken this many LNG projects at the same time.

Longtime Investors: Japan and South Korea

Japan is completely reliant on LNG imports for its gas supply. The Australian Bureau of Resources and Energy Economics (BREE) said in a published paper in July that it expects Japan's LNG imports to increase at a rate of 2 percent per year. BREE projected that by 2017, Japan will need to import 80 million tonnes of LNG.

South Korea is in the same situation as Japan. BREE estimates that South Korea's LNG imports will continue to grow from 2014 to 2017 due to the successful completion of infrastructure expansions designed to increase residential and commercial access to gas. BREE forecasted that South Korea's LNG imports will hit 42 million tonnes from 33 million tonnes in 2011.

Since these two Northeast Asian countries are so reliant on Australia for LNG, it comes as no surprise that Japanese and South Korean companies have been snapping up equity stakes in exchange for guaranteed off-take in new Australian LNG projects.

According to Lead Analyst of Energy at the Economist Intelligence Unit (EIU) Peter Kiernan, selling equity could be a way for the new Australian LNG projects to address the problem of high costs associated with construction and start-up operations.

"This is usually a mutually beneficial transaction. The LNG project receives funding, while the investing company is assured of a certain amount of off-take for a contracted period," Kiernan told Rigzone in an interview.

One of the most closely watched transactions is the move by Mitsui & Co. and Mitsubishi Corp. (MIMI) to purchase a large stake in the Woodside-operated Browse development. Woodside confirmed on August 22, 2012, that it will sell Japan Australia LNG (MIMI Browse) a 16 percent interest in the East Browse joint venture and an 8 percent stake in the West Browse joint venture as "all conditions precedent have been satisfied. The sale – worth $2 billion – will give MIMI an estimated 14.7 percent interest in the Browse development, on an assumed unitized basis. Woodside's assumed unitized interest in the Browse development will fall from 46 percent to 31.3 percent.

Woodside had also accepted an offer from MIMI for a long-term sales and purchase agreement for around 1.5 million tonnes of LNG per year from the Browse development project subject to the completion of the equity offer. The transaction includes a joint marketing agreement between Woodside and MIMI under which the parties will jointly market co-mingled LNG volumes to the Asian spot market.
Meanwhile, South Korean state-run gas developer and supplier Kogas invested an estimated $1 billion in Royal Dutch Shell's Prelude LNG project and at least $2 billion in the Gladstone LNG project. Kogas has a 15 percent stake in the Gladstone project and a 10 percent stake in the Prelude project. Each project is expected to provide the company with around 3.5 million tonnes of LNG annually.

The Red Flag Rises

The Chinese, competitive in the energy race, have also started setting their sights on Australia. With urban migration seeing no slowdowns in the coming years, China's LNG needs are outpacing its policies to secure external sources of supply and the shortage appears to be dire in the medium-term. BREE estimates that China will import 13 million tonnes of LNG to support its regasification capacities in Zhejiang, Ningbo and Dalian. BREE noted that China is planning to add more regasification capacities over the next five years, and the country's LNG import need will balloon to 37 million tonnes by 2017.

Since 2010, there have been three noteworthy contracts inked by state-backed Chinese companies. Of the two projects, APLNG appears to be the one garnering more interest due to the large amount of equity that was transferred to a Chinese company.
In July 2011, Australia's Origin Energy diluted its stake in APLNG from 50 percent to 42.5 percent when Sinopec joined the project. The Australian company later announced on July 4, 2012, that it had offloaded additional stakes in APLNG to Sinopec. The deal which Origin inked with Sinopec saw its interest in the APLNG project drop to 37.5 percent. To-date, Origin and its partner in APLNG, ConocoPhillips each have a 37.5 percent stake in APLNG, while Sinopec's interest is 25 percent.

In Origin's earnings statement released on August 23, 2012, the company said that if it achieved the planned dilution in APLNG below its current shareholding of 37.5 percent, its current funding position will further improve. Origin's intention to offload further stakes is made clear based on a report by Bloomberg on August 21, 2012. The report stated that Origin and ConocoPhillips – Origin's partner in APLNG – are working with JPMorgan Chase & Co. to help the joint venture with a third round of equity sale in APLNG. Sources involved in this transaction have been tight-lipped and it is unclear if Sinopec will be able to purchase an even greater interest portion in APLNG.

Another new LNG project that allowed China to make inroads into Australia is BG Group's QCLNG project. The company said on March 24, 2010, that it has agreed to supply China National Offshore Oil Corporation (CNOOC) with 3.6 million tonnes per annum (mtpa) of LNG over a 20-year period. Under the terms of parallel agreements, CNOOC will acquire a 5 percent interest in the reserves and resources of certain BG Group tenements in the Walloons Fairway of the Surat Basin in Queensland. The total book value of assets being sold is $270 million. In addition, CNOOC will become a 10 percent investor in QCLNG Train 1, the first of two liquefaction trains which will form the first phase of QCLNG development. CNOOC will reimburse BG Group for 10 percent of costs incurred in respect of Train 1.

Singapore, a Possible New Entrant

Although Singapore is not involved in any of the new LNG projects coming up in Australia, there is a strong argument for the city-state to seriously consider participating in one of the projects through an equity purchase.

At present, Singapore's power stations consume 80 percent of its gas from Indonesia and 20 percent from Malaysia. Taking a long-term view of energy security, 80 percent of gas for power generation coming from Indonesia is considered over-dependent on a single source. An example which illustrates this is an incident which took place in 2010. During that year, Batam Island experienced an inadequate supply of gas, and local politicians had threatened to shut the supply down to Singapore as the gas supply pipeline passes through from Batam Island to Singapore. This shows the vulnerability of Singapore and its over-dependence on a sole source for gas supplies.

Singapore has already started drawing up back-up plans to ensure that it has gas supplies from other sources. A $1 billion LNG terminal – which the Singapore government approved for construction in 2010 – is scheduled to start operations in 2013. The LNG terminal, that can handle six million tonnes of LNG when fully developed, offers Singapore a fourth source of gas supplies other than its three trans-nation gas pipelines from Indonesia and Malaysia. According to a country report published by Associate Professor SC Low from Singapore's Nanyang Technological University in November 2011, he stated that the logical choice of LNG supplies to Singapore's newly built terminal will be LNG from either Australia or Qatar.

And Singapore has proven that it is willing to open its coffers to secure much needed LNG resources. China's sovereign fund, CIC, and Government of Singapore Investment Corp. (GIC) have invested around $500 million each in U.S.-based Cheniere Energy Partners planned LNG export plant, The Business Times reported on August 21, 2012.

The GIC move follows a $468 million investment in May this year by Singapore investment company Temasek Holdings and Asia-based private equity firm RRJ Capital for a combined 19.8 percent stake in Cheniere Energy, the daily reported. The latter has controlling interest in both the Sabine Pass terminal as well as a second export terminal at Corpus Christi. Cheniere, which is the first U.S. company to get the necessary U.S. approvals to export LNG from shale gas projects there, has been seeking funds to start construction of its Sabine Pass terminal. The company received its LNG export permit in April this year. It had since issued a work notice to Bechtel to build the $5.6 billion project.

With Singapore already placing its bets with a U.S.-based LNG company, the million-dollar question is whether the country will start training its sights onto proximity-advantaged Australia?

The Road Ahead for Australia's LNG Industry

While escalating costs, labor issues, slow construction times and larger capital expenditures concerning Australia's LNG industry have been hotly discussed issues these days, it is undeniable that the country is geographically well-placed to continue to supply the larger existing markets of Japan, South Korea and greater China. Looking further forward, the country could also emerge as a choice supplier of LNG for Southeast Asia.

Nonetheless, counterbalancing these cost-related issues for Australia's new LNG projects are the country's stable system of government and established fiscal and regulatory frameworks that encourage foreign investment.

In this respect, Australia will find that over the short and medium term, its new LNG projects will remain very attractive investment propositions for the more well-heeled Asian countries. The country's goal of surpassing Qatar as the world's leading exporter by 2020 could very well be within its reach.


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