Gladstone pays high price for its new industry

THE east coast gas hub is coping with some massive infrastructure.

Gladstone pays high price for its new industry

AT the end of last year, workers for British gas giant BG Group turned a tap on the Queensland mainland that piped gas to Gladstone's Curtis Island for the first time.

The milestone means plans worth $70 billion to export coal seam gas through Curtis Island, where 11,000 workers are building liquefied natural gas plants, are close to fruition.

From the second half of this year, when BG plans to send its first LNG tanker out of Gladstone, six massive LNG liquefaction trains -- which the industry says are the most expensive and complex manufacturing plants in the country -- are scheduled for rolling starts over the next three years. This will increase eastern Australia's gas demand fourfold and make Queensland one of the world's biggest LNG exporters.

The prize, with LNG prices as high as they have ever been, is big.

At current estimated long-term contract prices, the 25.3 million tonnes of LNG that will potentially be shipped out of Gladstone Harbour each year would fetch export revenue of $US7.6bn. This would provide healthy cashflows for the owners of the plants that will have sunk the huge upfront development costs.

But the risks are also high.

Coal seam gas export, which requires thousands of wells to be drilled, is untested on such a large scale, and the rapid start-up in one place of six LNG trains (from three adjacent projects each costing about $20bn each) is unprecedented. Firing up the huge plants, which freeze the gas into liquid so it can be put on ships, is also not a simple matter.

The most recent LNG project to start up in Australia, Woodside's one-train, $15bn Pluto project in Western Australia's Pilbara region, came on 14 months late and $3bn over budget, with the delays largely to due to mechanical and specification issues in the later stages of construction.

So, while the market is mostly focused on the potential gas shortfalls that could arise as each of the projects tries to gather CSG from 2000 or so individual onshore wells, the rapid start up of six massive gas freezers on Curtis Island will also be a challenge.

The risk will be limited to some extent by the Curtis Island projects all being constructed by experienced LNG plant builder Bechtel.

The US contractor is building about half the world's under-construction LNG plants but Curtis Island is its biggest site.

Bechtel's Gladstone general manager Kevin Berg says this year is the peak year for LNG construction, as the plants move closer to commissioning, start-up and production.

"We expect to maintain our peak workforce of about 11,000 employees through to the second half of the year, transitioning from civil trades into the employment of electrical and mechanical trades, special class welders, instrument technicians and pipe fitters," Mr Berg said.

The three projects are BG's Queensland Curtis LNG project, the Santos-led Gladstone LNG project, which is targeting early 2015 exports and the Australia Pacific LNG project.

The latter is operated by a partnership between Origin Energy and US energy major ConocoPhillips and it plans to ship LNG from the middle of next year.

Gladstone mayor Gail Sellers says the project has been great for the industrial harbour city, but has brought big changes some found hard to take.

Property prices and accommodation prices have doubled, the council had staff turnover of 25 per cent and small high-rises have been built for the first time.

The pressure has eased somewhat with Bechtel now housing half its workers on the island.

"Housing prices are down 25 per cent in the past six months, things are getting back to what we could say are a more sensible level," Sellers says.

"Gladstone has been running at a rapid speed -- people who lived here found it hard to cope with all the people in yellow shirts, intersections and roads were busier,

shopping centres were at their maximum and people were in a hurry to get to the island."

She does not believe the end to the boom construction period will be a hard transition for the town.

"People were aware it was never going to go on forever, we've known exactly how long the construction would take and how long the big money would there," Sellers says. "Once all the construction is done, the workforce goes from 11,000 down to about 750 and things will be more back to normal."

According to all three project proponents, everything is going to plan after each registered some form of cost blowout in 2012 and last year.

Each says its LNG plant and its onshore gas production efforts are running to plan and throwing up no surprises.

But even though early community objections to the gas fields have largely been dealt with by the proponents, scepticism about whether the projects will properly gather onshore gas from thousands of wells for what is essentially one massive LNG project using an untested gas source remains high. GLNG and QCLNG have had to source third-party gas and industry talk says much of the CSG drilling has not produced as much gas as had been expected.

APLNG is seen as having the best coal seams with the most abundant reserves and is not grouped in with the concerns.

Credit Suisse energy analyst Mark Samter has been one of the more vocal doubters amid opaque indications about how much gas the projects actually have, pointing to a contingent resource downgrade by GLNG last year.

"The clear evidence to date suggests these projects are learning as they go along and the lessons are not always particularly friendly," Samter says.

"Channel checks with the industry suggest that some of these projects in Queensland could end up requiring 25 to 50 per cent of third party gas for the life of the project, which would significantly reduce their value."

While the projects may have their own gas worries that cold eat into their margins, there is available gas in Queensland.

The Arrow LNG project owned by Shell and PetroChina has abandoned its plans to build a separate LNG project and is focused on joining one of the existing projects, probably through a new train.

But if the projects are as short of gas as Samter suggests, that gas may well be needed to fill capacity for the projects already under construction.