Feeding the PRC's Growing Energy Demand

Australia's huge Gorgon gas field may soon provide LNG to help meet China's growing energy demands.

Last week, the China National Offshore Oil Corp. (CNOOC) and the Gorgon Venture signed an agreement they expect to lead to one of the biggest LNG deals ever: the sale over a period of 25 years of 100 million metric tons of liquefied natural gas to the People's Republic of China. The agreement--a so-called framework--was signed in Canberra, Australia, on October 24 during a state visit by PRC's president Hu Jintau. It is one of several agreements that set the stage for negotiating trade deals in many areas between the two countries.

The Gorgon Venture is a joint enterprise between ChevronTexaco (4/7), Shell (2/7), and ExxonMobil (1/7), with ChevronTexaco as the operator. It was formed to exploit the huge, subsea Gorgon gas field, which lies some 143 miles off the northwest coast of Australia near Barrow Island. The agreement calls for CNOOC to also buy a substantial equity stake in the Gorgon Venture's gas development. The huge deal is valued at some AUS$30 billion (AUS), or US$21 billion. It will provide enormous amounts of energy for PRC's booming economy, and it will solidify Australia's status as the only net exporter in the Asia Pacific region.

Growing Regional Production
The Gorgon gas field, from which the project takes its name, is estimated to be Australia's largest. It contains proven 12.9 trillion cf (proved plus probable 17.5 trillion cf and up to 27.5 trillion cf when possible reserves are added). The North West Shelf Reserves, of which the Greater Gorgon Area is a part, may contain as much as 40 trillion cubic feet, based on estimates including results of exploratory drilling over the past three years.

Natural gas now plays a relatively small role in Australia's fuel mix. But the sizeable North West Shelf reserves coupled with a decline of oil reserves led the Australian government to put an emphasis on natural gas for both domestic consumption and export. In 2001, the government created a "Gas-to-Liquids Taskforce" charged with increasing the role of natural gas in Australia's economy.

Just last year, Woodside Petroleum Ltd., operators of the North West Shelf Venture near the Gorgon field, signed an agreement with China's Guangdong LNG buying consortium to supply more than 75 million metric tons of LNG over 25 years beginning in 2005.

Jay Johnson, Managing Director of ChevronTexaco Australia--the operator of the Gorgon Joint Venture--said the agreement with CNOOC now provides a basis upon which to underpin the commercialization of the Gorgon gas field.

With Gorgon and North West Shelf Venture both producing after 2005, the area could conceivably deliver more than 175 million metric tons for 30 years.

The Gorgon Area gas includes the Gorgon, Chrysaor, Dionysus, West Tryal Rocks, and Spar fields. The Gorgon and Chrysaor/Dionysus fields extend for a distance of nearly 70 kilometers. There is potential to further increase the gas reserves available with the discoveries being made in deepwater exploration permit areas shared by the three Gorgon participants and BP Developments Australia Pty Ltd.

Independent reserves certification, a usual requirement of LNG Sales and Purchase agreements, were completed for the Gorgon Development in 1998 as part of the Gorgon Development Plan. Total certified proven hydrocarbon reserves for the Gorgon Area fields currently stand at 12.9 trillion cf, with certified proved plus probable reserves at 17.5 trillion cf and certified proved plus probable plus possible reserves at 22.3 trillion cf.

First Things First
Before the drilling starts, there are a few hurdles for the Gorgon project. One is completing environmental documentation required for permitting. Final approval is required for siting of processing facilities on Barrow Island. This according to ChevronTexaco, is central to the commercial viability of the development of the Gorgon Area gas fields.

Barrow contains one of Australia's most important onshore oilfields, which has produced since 1967. It is also a Class A Nature Reserve, particularly important as a refuge for rare wildlife species. The island's value for flora and fauna was first recognized in 1908 when it became a public reserve, a classification that was upgraded to a Class A Nature Reserve in 1910. Petroleum interest dates back to 1947 when the first exploration permit was issued. In 1964, the discovery of oil led to a decision by the Western Australian Parliament to allow petroleum activities. ChevronTexaco emphasizes that since then, more than 900 wells have been drilled, including over 500 oil production wells. Today 455 wells are operating and almost 300 million barrels of oil have been produced, making Barrow Island the biggest onshore oilfield developed in Australia. ChevronTexaco says a strict environmental program, which protects the island's unique flora and fauna, has enabled the petroleum activities to coexist with the island's Class A Nature Reserve status. Chevron was the technical advisor to the original operator, West Australian Petroleum Pty Ltd (WAPET), whose work on the island, according to ChevronTexaco, is internationally recognized for achieving sustainable development alongside oil production. ChevronTexaco assumed ownership of WAPET in February 2000. As operator, ChevronTexaco says it will be committed to the environment, and stakes its reputation for leadership in environmental management and safety on ensuring that the conservation values of Barrow Island continue to be preserved and protected.

Despite the Barrow record, opposition to a development on Barrow Island developed. Environmentalists opposed initial permitting before the Western Australia Environmental Protection Agency.

On September 8, the government of Western Australia approved in principle citing the Gorgon gas processing facilities on Barrow Island. This is a labor party government and when its decision went against the advice of the WA environmental agencies, accusations were made that the government broke a pre-election promise. The government stressed the economic benefits of the AUS$11 billion project and said it was relying on the measures promised by the joint venture partners to minimize environmental impact.

Perhaps the key factor that makes Barrow Island such an important site in the eyes of Gorgon planners is a line of underlying deep saline reservoirs which will allow reinsertion of CO2 at reasonable costs, keeping greenhouse gas emissions low. Gorgon gas contains some 12.5 percent CO2. Australia is concerned with staying within limits of the Kyoto protocol.

ChevronTexaco is confident that the LNG facility can coexist with the wildlife reserve, and points at its oil operation which has done so for some 56 years as evidence. This did not impress the Western Australia Environmental Protection Authority, one of the agencies that opposed the siting permit, saying the Gorgon partners failed to demonstrate that it could operate with an acceptably low risk to the environment and conservation values.

Nevertheless, the Gorgon development received approval-in-principle last month from the Western Australian state government for access to Barrow Island, and a State Agreement has been signed to facilitate the establishment of gas processing facilities on the island.

This access, however, is not the last regulatory hurdle. Still to come: formal state and federal production and environmental approvals requiring highly detailed proposals.

And then the economic challenge remains also. More gas contracts are needed in the Pacific Basin to raise LNG production to economic levels. So there is plenty of work to be done, but PRC needs the gas and Australia needs the exports. Don't be surprised if ChevronTexaco and the environmentalists reach an accommodation that helps move things along.