Rich in hydrocarbons and an up-and-coming major player in LNG exports, Australia is in possession of plenty of known assets that have attracted global oil and gas majors.

But the country’s unknown assets may turn out to be a bigger draw.

“Australia has potential for large discoveries of oil and gas, with many offshore basins remaining largely or entirely unexplored,” Kelly Ralston, senior trade investment commissioner with the Australian Trade Commission, told an international breakfast crowd at the recent Offshore Technology Conference (OTC) in Houston. “Only 20% of Australia’s offshore basins are currently covered by petroleum titles. Frontier exploration is definitely growing.”

BHP Billiton’s Rob Jellis echoed the optimism at the OTC breakfast, especially concerning LNG exports. LNG capacity investment is estimated at more than $200 billion, according to the Australian Petroleum Production & Exploration Association (APPEA).

“We are currently third in the world, but come the end of the decade, we’ll be at the top of the tree,” predicted Jellis, who manages global nonoperated production assets for BHP from Houston. While conventional land facilities have faced rising expenses, attention has begun to shift to the development of floating LNG (FLNG) facilities as a means to control capital cost.

“We’re seeing this new emerging technology as the next step as we try to develop the really remote gas that Australia’s been endowed with,” he said.

Higher volumes, higher costs

Shell’s Prelude FLNG facility has been considered the game changer—not just for Australia, but for the global industry—when it comes online in 2016.

Now under construction at Samsung Heavy Industries’ Geoje shipyard in South Korea, Prelude will be located in the Browse Basin, about 125 miles off the Western Australia coast in water depth of about 820 feet, and will represent the global energy giant’s first deployment of this technology. Prelude is designed to be capable of production, liquefaction, storage and transfer of LNG at sea, and will be able to process and export LPG and condensate from the Prelude and Concerto natural gas fields. The two fields are estimated to contain 3 trillion cubic feet of liquids-rich gas.

The floating facility, 67.5% owned by Shell, will be the industry’s biggest, measuring 1,600 feet by 243 feet and weighing more than 600,000 tons, including 260,000 tons of steel. Prelude’s cost is estimated at between $10.1 billion and $11.8 billion.

But FLNG is not the answer for all players. Australian energy company Santos Ltd., based in Adelaide, and Paris-based GDF Suez SA retreated from their plan to deploy an FLNG facility in the Bonaparte Basin offshore the Northern Territory, electing instead to build a 100-mile pipeline to an onshore gas processing plant in Darwin. The technology’s drawbacks include the technical challenge of operating a gas plant at sea, especially given ocean movement during storms.

Onshore, the biggest midstream infrastructure challenge is that so much needs to be built. The Australia Pacific LNG project—a 330-mile pipeline involving Origin Energy, ConocoPhillips and Sinopec—has experienced ballooning costs that surpassed $23 billion.

The venture, about two-thirds complete, will connect gas fields in the Surat and Bowen basins to an offshore LNG processing plant on Curtis Island, offshore Queensland.

The Gladstone LNG project, which includes Santos (30%), French energy giant Total SA (27.5%), Malaysian national oil and gas company Petronas (27.5%) and Korea Gas Corp. (15%), involves building a 42-inch, 261-mile pipeline to move coal seam natural gas from the Surat and Bowen basins to Curtis Island. The project includes construction of a two-train processing facility and development of gas fields and is estimated to cost $18.5 billion—well above the original estimate of $15 billion. The pipeline is estimated to be 75% complete, and the project is expected to produce first gas in 2015.

The Queensland Curtis LNG Project, a 50:50 venture of China National Offshore Oil Corp. (CNOOC Group) and U.K.-based BG Group Plc, is pegged to be the world’s first project to turn coal seam gas to LNG. It involves a 42-inch, 330-mile export pipeline from the onshore Surat Basin to near Gladstone. Originally estimated to cost $14 billion in 2010, the project budget soared to $19.1 billion in 2012, where it has remained.

What could go wrong?

Australian government officials and industry experts have been virtually pleading with the energy industry to bring climbing costs under control.

“Spiraling construction costs will continue to act as a drag on the sector if they continue unchecked,” Industry Minister Ian Macfarlane was quoted by Hart Energy’s Oil and Gas Investor Australia, sister publication of Midstream Business, telling delegates to the recent APPEA conference. “Australia cannot expect to compete with other countries for as long as these costs are exorbitant. All parties have to bear this in mind given the greater competition for the international LNG market.

“If Australian projects price themselves out of that market then it’s not only workers, but also the national economy that stands to lose out,” he said.

Macfarlane noted that some industry workers were paid an additional $40,000 per year for sharing a common living area on a work site.

“To pay someone $40,000 a year to do that, I think you don’t have to be Einstein to work out that that’s driving our costs through the roof,” he said.

“Australia has a shipping cost advantage relating to proximity to market,” Deloitte oil and gas partner Geoffrey Cann told executives, according to Oil and Gas Investor Australia. “But the cost disadvantage to Australia shows up in productivity, wage rates and cost of doing business in relation to remote areas reliant on a fly-in fly-out workforce.

“Looking at eastern Australia, you might ask how do you trim $4 cost out of a $14 project to compete with U.S. rivals? Well, looking at liquefaction you might take out $1. Upstream is the big elephant, and the prize is substantial when it comes to trimming money from delivered gas cost relating to drilling wells—subject to negotiating with landowners—regulation and infrastructure.”

Former Saudi Aramco executive Hameed Siddiqui reiterated threats from competition at the Australian Gas Export Outlook 2014 conference in Brisbane: “The cost of developing brownfield sites in the U.S. is low … future LNG deals must reflect the higher costs of developing greenfield sites [such as in Australia].”


Origin Energy’s Talinga coal seam gas processing plant in Queensland is the company’s largest in Australia. Source: Origin Energy

Lurking challenges

In fact, in the study, “The Geopolitics of Natural Gas,” published by the Baker Institute at Rice University in Houston and the Kennedy School of Government at Harvard University, challenges lurk nearly everywhere.

In a future scenario that depicts emerging economies turning the region into a gas demand center, “We see that Iran takes over the market in India and a little bit in Pakistan as well,” said Meghan O’Sullivan, director of the Geopolitics of Energy Project at Harvard and a study co-author.

“The implication of this is that Australia is the first to get hit because of Iran’s emergence as an LNG exporter and also because of its pipeline gas to south Asia,” O’Sullivan said. “With Iran capturing that south Asian market, Qatar maintains the northeast Asian market and that has the impact of forcing out Australia. So, what we see is a situation in which Iran is really replacing Australia.”

That scenario assumes stability in the Middle East, which is hardly a given, but it’s far from the only threat to Australia’s LNG export ambitions.

“I don’t want to leave you with the impression that it’s only the Middle East stability case that ends up hurting Australia,” said co-author Amy Myers Jaffe, executive director of energy and sustainability at the University of California, Davis. “One of the things that we find very striking in the scenarios is that any scenario that affects China will affect Australia.”

The study calls China’s emergence as an economic power “one of the defining events of the 21st century.” At the moment, China relies heavily on coal (50.2% of global demand) with natural gas a secondary fuel (4.3% of global demand). However, gas is one of the country’s fastestgrowing energy sources, trailing only wind and solar, and “China is starting to consume enough gas to matter from a global market standpoint,” the study added.

China’s economy is growing so fast that even though it is the eighth-largest gas producer in the world and boasts 21.8 trillion cubic meters (Tcm) in reserves, the country is unable to keep up with demand.

The government’s 12th Five-Year Plan (2011 to 2015) is the first to confront climate change by calling for a shift from coal and oil to natural gas. By the end of 2012, there were 1.5 million vehicles on China’s roads running on CNG and LNG, or 10 times as many as in the U.S.

China’s expanding demand for gas would seem to play to Australia’s strengths of geographic proximity and increasing production. However, while China accounts for about 20% of Australia’s exports, it is seeking to diversify its sources of imported gas. Australia supplies the largest share, about 30% of China’s LNG imports, but is just one of 12 countries providing gas, and China is moving forward with plans to increase pipeline imports. The recently opened Myanmar-China Pipeline has an annual capacity of 12 billion cubic meters.

Time for a reality check

The Rice-Harvard study is not alone in
sounding the alarm.

“Despite all this excitement, as evidenced by the volume of projects vying to supply global demand, Australia and other megaprojects present a reality check,” said Mary Hemmingsen, Toronto-based partner in energy advisory services for KPMG at the company’s Global Energy Conference recently in Houston. “Specific to LNG, project costs in Australia have escalated by over 40% over original estimates, and they have obviously severely eroded the returns.”

Hemmingsen, one of the principal authors of the report, “Major LNG Projects: Navigating The New Terrain,” was joined in her concerns by George O’Leary, vice president for oil service, engineering and construction and coal research at Houston-based Tudor, Pickering, Holt & Co.

“There are problems in Australia for everyone building LNG projects,” O’Leary said during a panel discussion at the KPMG conference on developing the global LNG market. “On top of what you had in Australia, from a labor inflation standpoint, you also had currency inflation.”

The KPMG report lists six major issues in addition to the leading concern of final capital costs greatly exceeding original estimates:

  • Workforce cost: a 50% increase in cost per hour from original estimate to completion;
  • Unreliable contractors: inability to deliver in a cost-effective and timely manner;
  • Supply chain/logistics: challenges are underestimated;
  • Regulatory burden: federal/state duplication, multiple approvals among agencies, environmental concerns;
  • Lack of infrastructure: complicated by multiple ownership and responsibility and complexity of requirements (ports, roads, rail, pipelines, storage); and
  • Passive government engagement on key issues: lack of a “big picture” approach, slow approval process and project backers don’t convey scale of government engagement needed.

Then there is the drawback to success—too much product on the market.

“Currently, the demand for global LNG is outpacing the supply, and this is largely due to the Fukushima impact, the sudden change in demand for LNG, and also the role of China, perhaps, which is above what was anticipated,” said Renee Klimczak, president and CEO of Houston-based Jarrah Group at the KPMG conference. “The supply just hasn’t caught up yet, but the Australian projects come into play over the next five years. When U.S. exports get started later in the decade—2018 to 2020—you should see that dynamic change and maybe get to a point where there’s excess supply relative to the demand in the marketplace.”

On the bright side

Chandra Brown, the U.S. Commerce Department’s deputy assistant secretary for manufacturing, listed three key factors of Australia that businesses can count on for OTC attendees:

  • Stable political environment;
  • Transparent regulatory structure; and
  • Proximity to Asian markets.

Ralston, based in Australia’s embassy in Washington, added her country’s educated workforce to the list, as well as its embrace of cutting-edge technology.

“Australia has a long track record of innovation and early adoption and is well-positioned to become a fast follower in the growth of unconventional gas plays,” she said at OTC.

But it’s the third point—the country’s prime position near the booming emerging economies of China, India and others—that is of particular interest to Australia’s ambassador to the U.S., Kim Beazley. “We cannot be beaten for location, cannot be beaten,” he stated earlier this year at a conference in Houston.

“Australia succeeds as a country, basically, because Australians believe that solutions require complex thought,” said Beazley, who previously served as Australia’s deputy prime minister and defense minister, among other positions.

Rapidly escalating costs have discouraged investment in Australian oil and gas exploration and production, which is stunting development of badly needed infrastructure. LNG developers in particular have watched projects balloon in cost. Chevron’s Gorgon project in Western Australia has spiraled from initial estimates of $37 billion in 2009, to $64 billion by the end of 2013. Meanwhile several developers like Woodside and Shell have been forced to shelve their Arrow and Browse LNG projects due to fears of cost increases.

Nevertheless, Sydney-based Origin Energy recently bought out the interest of Melbourne-based Karoon Gas in the offshore Poseidon gas field for $800 million. The company plan is leaning toward construction of a 311-mile pipeline to move the gas to an onshore plant.

Still, the resources to be exploited are abundant and likely to grow. The reserves Ralston cited, as estimated by the U.S. Energy Information Administration, included:

  • 4.4 Tcm of natural gas;
  • More than 6.3 Tcm of coal bed methane;
  • 11 Tcm of shale gas;
  • 4 billion barrels of oil, condensate and LPG reserves; and
  • Significant potential to develop condensate and shale liquids.

Follow the customers

Figures like these may have captured the attention of majors like Apache, Halliburton and Schlumberger, but Ralston noted another trend.

“We’re seeing many small and midsize [companies]—U.S. companies in particular—following those customers to market and entering our market through those existing customer relationships,” she said.

That was his company’s story, said Ashraf Jahangir of consulting firm Kleinfelder, based in San Diego.

“We have existing clients who are doing business in Australia, and we figured it would be a good idea to follow them,” he said to the crowd at an OTC breakfast.

Kleinfelder opened its Melbourne office in 2010, gained a $28 million consulting contract in 2011, bought two small Australian consulting firms in 2012 and continued to grow its business in a slow economy through 2013. The company now employs 100 people in three offices—Melbourne, Newcastle and Adelaide.

Jahangir said it is easy for a company new to Australia to become immersed in the abundance of industry data.

“If I can provide any advice to you: find your story,” he told the crowd. Concentrating on the data and intelligence that is applicable to a particular company’s service or product will be of most use in growing a business.

Joseph Markman can be reached at jmarkman@hartenergy.com or 713-260-5208.

Comments