Analysis: Australia LNG to Ramp Up

Australia first drilled for oil in the Coorong area of South Australia in 1892, and first drilled an offshore well in Albany harbor in Western Australia in 1907. Today Australia's biggest export is LNG. In 1999, the country exported about 7.8 million tonnes, which is expected to grow to about 20 million tonnes by 2010. As the demand for alternative energy sources grows, look for Australia's LNG to grow too.

There are three major offshore sources of oil and gas off Australia -- the Bass Strait, which has the Gippsland Basin and Otway Basin, the North West WA, which consists of the Carnarvon and Browse Basins, and the Northern Territory, which includes the Bonaparte Basin / Timor Sea.

Map Australia Regions

Bass Strait

The Gippsland Basin is Australia's largest producer. Discovered reserves are estimated at about 4 Bbbl and 10 tcf. Offshore oil exploration started when Lewis G. Weeks, a geologist, confided in Broken Hill Proprietary (BHP) that he knew where to find oil. Together with operator Esso, BHP set off to drill the East Gippsland Shelf-1, later renamed the Barracouta-1, with the Glomar-III exploration vessel in winter 1965. Esso discovered a 102.5 m gas column at a depth of 1,060 m. The operator drilled a second successful well on the structure. These discoveries combined with discoveries made in 1966 at the Marlin field confirmed that Gippsland was a major gas province.

In 1967, Esso drilled Kingfish-1 in the Gippsland Basin and encountered 1.2 bbl, which led to three major gas fields -- Barracouta, Marlin, and Snapper - and the two largest oil fields in Australia -- Kingfish and Halibut.

The Otway Basin, off Victoria and South Australia, was first drilled in 1966 by Esso, Shell, and Frome-Broken Hill. They drilled 22 wells, but encountered only minor gas shows. Then in 1980, Beach Petroleum made a gas discovery in North Paaratte-1, which was promising. However, it wasn't until 2002 that offshore exploration of the Otway Basin paid off when Santos Ltd. discovered the Casino field. The Casino field started production in February 2006 and produced at a rate of 10 Bcf by 2007.

The Otway Basin, off Victoria and South Australia, was first drilled in 1966 by Esso, Shell, and Frome-Broken Hill. They drilled 22 wells, but encountered only minor gas shows. Then in 1980, Beach Petroleum made a gas discovery in North Paaratte-1, which was promising. However, it wasn't until 2002 that offshore exploration of the Otway Basin paid off when Santos Ltd. discovered the Casino field. The Casino field started production in February 2006 and produced at a rate of 10 Bcf by 2007.

The Bass Strait is home to dozens of offshore platforms and installations as well as a network of 373 mi of subsea pipelines. One of the newer developments in the Bass Strait is the Kipper field, which is in 328 ft of water 28 mi off of Gippsland. The Kipper Unit Joint Venture, which is operated by Esso with partners Santos and BHP Billiton, discovered the Kipper field in 1986. The joint venture estimates recoverable reserves of about 620 Bcf and 30 MMbbl. First production is expected in 2011, followed by the second stage of development in 2014, and the last phase of development in 2016.

Other new developments in the region include the Yolla, Minerva, Casino, Geographe, and Thylacine fields. Most of the initial discoveries are estimated to be depleted by 2020, but these newer developments should produce through 2030.

Northwest Western Australia

The Carnarvon and Browse Basins are in Northwest Western Australia. The Carnarvon Basin holds the North West Shelf gas fields where the Gorgon and Jansz fields, which are among the largest in the country, were discovered. The region is an important source of natural gas.

The Wheatstone gas to LNG project will produce from two fields in the Carnarvon Basin-- Wheatstone and Iago. Discovered in August 2004, the Wheatstone gas field is in 700 ft of water.

The Sedco 703 semisubmersible drilled the first Wheatstone well in summer 2004.

Chevron operates the Wheatstone field with partners Apache and KUFPEC. The field is estimated to hold 4.5 Tcf of natural gas.

Also part of the Wheatstone project, the Iago field was discovered in December 2000. The Pride South Pacific semisubmersible drilled the first well. In July 2008, the Ocean Bounty semisubmersible drilled the second Iago well, which confirmed a southerly extension of the field.

Chevron will develop the Wheatstone project in several phases. The first phase includes the completion of two LNG processing trains and a domestic gas plant with the capacity to process 8.6 MTPA of LNG. Chevron expects production to commence in 2016.

The Gorgon project is also underway in the Carnarvon Basin. The Greater Gorgon area incorporates a number of gas fields in waters ranging from 722 to 4,265 ft. With estimated reserves of 40 Tcf of gas, Greater Gorgon is Australia's largest undeveloped gas resource.

Development plans for Greater Gorgon include subsea completions for both the Gorgon and Jansz fields. These subsea developments will be tied-back to the onshore Barrow Island LNG plant via pipelines and control umbilicals. The project is expected to come onstream in 2014.

The Browse Basin is a new frontier for Australia, but it holds one of Australia's biggest undeveloped gas projects. The Inchthys field was first discovered in 2000, and deemed commercially viable in March 2009. Inpex operates the field with Total. The partners estimate that the field holds about 12.8 tcf of gas and expect to produce about 8.8 million tons of LNG a year. The first shipment of LNG is scheduled to be loaded in 2014.

Northern Territory

In the Northern Territory, the Bonaparte Basin and the Timor Sea are also producing significant amounts of oil and LNG. The Greater Sunrise field, which Woodside Petroleum operates, straddles the eastern lateral boundary of a Joint Petroleum Development Area, an area slated for development by Australia and East Timor in the 2002 Timor Sea Treaty. In 2007, Australia and East Timor agreed to equally split the royalties from the field. The Greater Sunrise field is estimated to have deposits worth more than $27 billion over the project's life.

The Blacktip gas field is also in the Bonaparte Basin. ENI owns and operates the field in 165 ft of water. ENI discovered Blacktip with the Blacktip-1 well. The Transocean Sedco Forex jackup drilled the discovery well in 164 ft of water. Blacktip holds about 933 Bscf and 5.7 MMbbl. Blacktip started production in September 2009. Produced gas from the field flows to the Northern Territory's Power Water Corp. and will continue for the next 25 years. Supply is estimated to rise to 18,000 boe/d over the life of the contract.

Australia's Rig Fleet

Looking at Australia's rig fleet, there are 13 rigs currently contracted; however only 12 are active. Included in the count is Seadrill's West Atlas jackup, which has been condemned by insurers following a blowout and subsequent fire onboard in August 2009 at the Montara oil field off the Kimberly region of Australia. The jackup is waiting on location.

On Aug. 21, 2009, Seadrill's West Atlas jackup was working for Thailand's national oil company, PTTEPA, at Montara when a hydrocarbon leak developed on a nearby well. The leak did not emanate from the West Atlas.

The damaged oil well spilled thousands of gallons of crude oil in the Timor Sea, and the Montara well head leak was the first offshore blowout since 1984.

Seadrill's West Triton jackup provided drilling relief, but is now enroute to Singapore.

West Atlas
West Atlas


West Atlas on Fire
West Atlas on Fire

The other 12 rigs include 10 semisubmersibles, one jackup (not counting West Atlas), and one drillship. With the exception of Woodside, which has two rigs deployed under contract, all other operators in the region have only one rig contracted and deployed in the region. The operators include BHP Billiton, ExxonMobil, Petronas, Chevron, Shell, Origin Energy, Hawkestone Oil Pty Ltd/Australian Drilling Assoc., Apache, Hess, and ConocoPhillips. It is worth noting that the lion's share of the floaters in the region are midwater units capable of drilling in water depths less than 4,000 ft. Currently, there are only three deepwater units in the region, only one of which is capable of drilling in ultra-deepwater (7,000+ ft).

Australia rigs

The utilization rate for Australia hovered around 94% for December 2009, which is impressive compared to the worldwide average of 75%. If we break it down into rig type, Australian semisubmersibles are 100% utilized, compared to 82% worldwide. Given the composition of the Australian floater fleet (73% midwater), a comparison of regional utilization to the global midwater fleet results in a better, apples-to-apples utilization comparison. Global midwater utilization stands near 78%. However, it is important to note that rigs going idle in Australia often migrate to shipyards in Southeast Asia for repair or to stack until additional demand materializes, which helps bolster the utilization rate in the region.

In Australia, the current average semisubmersible dayrate is in the high-$400s, which is slightly more than the worldwide semisubmersible dayrate in the mid-$300s. Jackups are averaging a dayrate in the low-$230s in Australia, a significant premium to the worldwide average of in the low-$130s. Jackups in the region are able to command premium dayrates to the global fleet as contractors pass on higher operating costs for the units deployed in the region - largely due to higher local labor costs. As shown below, this premium has averaged 50% over the course of this decade and almost 70% in 2008 and 2009. The one drillship working off Australia has a dayrate in the mid-$140s, which is much less than the worldwide average of in the mid-$380s (however, the Australian unit is a midwater unit and the vast majority of drillships worldwide are deepwater or ultra-deepwater capable).

Australian Jackup Activity

Given that the Australian rig market is dominated by midwater activity, it is worth digging deeper and looking closer at the earnings power of midwater floaters deployed in Australian waters versus the rest of the globe. Although to a lesser extent than jackups, Australian midwater floaters have historically been able to earn a dayrate premium to the rest of the global fleet (excluding Norway - which is a closed, harsh environment market that commands a significant dayrate premium due to higher operating costs and rig specs). The Australian midwater floater dayrate premium has widened for contracts signed in recent years, and since late 2007, midwater semisubmersibles in Australia have earned about a 20% premium to the global fleet.

Australian Midwater Floater Activity

Future of Australian E&P

Looking ahead to the end of 2009 and first half of 2010, the Ocean Shield jackup is due off contract soon. It started its current contract for ENI in January 2009 at dayrate in the mid-$260s, but was farmed out to Petronas in September 2009 for three wells. The contract is due to end in January 2010.

Ocean Shield
Ocean Shield

Though one jackup is dropping out of Australia, two semisubmersibles, both contracted by Woodside, are due to start contracts soon. The Maersk Discoverer will commence its three-year contract late 2009/early 2010, in the mid-$400s, and Diamond Offshore's Ocean America will start a two-year contract at the end of May 2010 in the low-$400s.

Maersk Discoverer
Maersk Discoverer


Ocean America
Ocean America

Look for more rigs to go to work in the near future for exploration drilling on the new blocks off Western Australia and the Northern Territory. Australia's Resources and Energy Minister Martin Ferguson awarded 10 offshore exploration permits in October 2009.

The Australian government received 17 bid for 18 blocks released in the second closing round of the 2008 Offshore Petroleum Exploration Acreage Release. Three permits in the Bonaparte basin went to Goldsborough Energy, Finder Exploration, and Murphy Australia Oil and Diamond Resources Australia. Two permits in the Carnarvon Basin went to Woodside Energy and Chevron Australia and Shell Development. And two more permits in the Roebuck basin went to Carnarvon Petroleum and Finder Exploration. Total planned investment is $158 million.




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