FT Alphaville An LNG headache, caused by an unconventional gas headache

15/5/12 9:37 PM

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An LNG headache, caused by an unconventional gas headache
Posted by Kate Mackenzie on May 15 12:44.

Australia, weve heard a lot lately, is set to overtake Qatar as the worlds biggest LNG producer by about 2020. The first shipment from the big Western Australian Pluto development set sail last month and things looked somewhat rosy for Woodside Petroleum, its owner and operator. However a story in todays Australian Financial Review confirmed what many have been thinking for a while: the proposed expansion of the Pluto project wont happen. The AFR quotes Woodside chief executive Peter Coleman: The drilling program hasnt delivered what we hoped a couple of years ago with respect to enough gas to expand Pluto, Mr Coleman admitted yesterday, flagging the company would call a temporary halt to its drilling campaign next quarter to take stock of recent results. Weve gone at it really, really hard, weve given it our best shot, he said in an interview. Which is interesting because so far its mostly the cost challenges of the in-development and proposed Australian LNG projects that have drawn most attention, rather than resources after all, Australia is meant to be awash with economically-recoverable coal seam gas (aka coalbed methane). BGs 1Q results from last week are a good example of the cost problems: BG Group now estimates that the QCLNG sanctioned investment of $15 billion1 will increase by 19% due to local market effects, increased costs of compliance with regulatory processes and some scope change. This underlying cost increase, combined with the 20% appreciation of the Australian dollar, yields a revised QCLNG investment of $20.4 billion2 and an upstream unit capex of $9 per boe3. Thats another $5bn, right there, thankyouverymuch. BGs QCLNG is one of three LNG facilities that have been greenlighted on the east coast, in Queensland. All are some way off completion, but a couple of other new projects are also proposed. One of these, Arrow LNG, is half-owned by Shell which is insisting that it plans to go ahead despite reports of a cost blowout. Shell Australia chairwoman Ann Pickard in Reuters last week: Obviously Shell has its own numbers, Arrow has its numbers, and PetroChina, our 50 percent partner, have their own numbers. From a Shell perspective, the project looks fine to me, but we are pretty conservative on our numbers. I dont see any blowout or increases, Pickard told reporters on the sidelines of an oil and gas industry conference in Adelaide. This followed an earlier report from Reuters citing an unnamed source as saying the costs were blowing out by 50 per cent from the original 2010 estimate. Labour costs and environmental regulations were (predictably) blamed, but the unconventional gas they were counting on also seems to have been a factor: Originally, the upstream development costs were estimated to account for half of the total cost of the overall project, which also includes gas l i quefaction plants, but now the proportion was set to be much higher, the source said.
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FT Alphaville An LNG headache, caused by an unconventional gas headache

15/5/12 9:37 PM

The source said that sharing of LNG facilities was one way to cap costs, but the main cost pressure of the project was coming from coal seam gas production. Another Queensland liquefaction plant under construction is GLNG, a project co-owned by Australian gas explorer/producer Santos (30 per cent); Petronas (27.5 per cent); Total (27.5 per cent); and KOGAS (15 per cent). That project has already had to 750petajoules of gas from Santos itself, and earlier this month signed up for 350PJ from Origin Energy, another Australian producer. This is despite GLNG, in common with most LNG projects, owning its own resources. In GLNGs case, those resources are coal seam gas in the Surat and Bowen Basin fields not far from the site of the LNG plant itself:

Buying in gas at oil-linked prices to meet your LNG feedstock needs is not usually the desired path to LNG profits. BAMLs Australian energy analyst David Heard wrote that the oil-linked purchases highlights [coal seam gas] is clearly stumbling. Heard however believes that Santos could stand to gain still more from LNG feedstock shortfalls. He writes that Santos natural gas resources a mixture of conventional and unconventional outweigh its exposure to the GLNG project itself, and that projects own supply shortfalls. GLNG is a poor project, sanctioned too early, without 2P reserves coverage. The Cooper Basin (and more broadly, Santos extensive east coast gas resources including the long-term position in NSW coal seam gas) are more relevant these resources can be delivered into the very strong market price dynamics emerging for East coast gas.

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FT Alphaville An LNG headache, caused by an unconventional gas headache

15/5/12 9:37 PM

Meanwhile, gas supplies stick out as a key reason for wariness about any more Australian LNG projects going ahead, even though there are another six projects (three of which are expansions) being planned around the country. Bernstein Research in February published a big global LNG note in which resources and reserves were listed as concerns against each of these proposed projects:

Building a LNG liquefaction plant is a big, expensive project, and most of the gas is already contracted for sale before a final decision is made to go ahead with the investment. The operators however generally refrain from contracting out 10 or 20 per cent of capacity so as to be able to sell it on the spot market. Which might not be such a great strategy now that the US is moving into LNG exports. Buying in gas linked to the oil price is very unlikely to give the kinds of returns that are expected when LNG plants are committed.
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FT Alphaville An LNG headache, caused by an unconventional gas headache

15/5/12 9:37 PM

Its all good though if youre gas producer with some uncommitted resources. Not so good if youre a domestic consumer or an LNG plant investor caught with less resources than you expected. Related links: Creative ways to avoid exposure to LNG cost blowouts FT Alphaville This entry was posted by Kate Mackenzie on Tuesday, May 15th, 2012 at 12:44 and is filed under Commodities. Tagged with coal seam gas, lng, Santos, shell, unconventional gas, woodside petroleium.

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