LNG plants set for $20bn second wind

Australia’s decade-long gas investment boom could have further to run.

Many pundits had written off the remote fields

Australia’s decade-long gas investment boom could have further to run, with looming spare capacity at the nation’s oldest LNG plants providing the potential for $20 billion of development decisions in the next five years.

Potential appetite for the new investment was evident this past week when North West Shelf LNG project operator Woodside Petroleum struck a low-cost deal with its Shelf partner BHP Billiton to buy a 25 per cent stake in the big, remote Scarborough gas fields.

Many pundits had written off the remote fields as having little chance of development under owners BHP and ExxonMobil, ­especially amid depressed prices.

But with gas fields at the North West Shelf, Australia’s oldest and biggest LNG project, beginning to decline early next decade after 30 years of operation, it will have spare infrastructure capacity that can slash the cost of developing new fields, such as Scarborough.

There is a similar story emerging at Australia’s second-oldest and smallest LNG plant, Darwin LNG, which is part-owned by Santos.

After successful drilling last year, Darwin LNG operator ConocoPhillips last month quietly called for invitations to tender for early engineering and design studies on the Caldita-Barossa field in the Timor Sea.

Conoco wants to use the gas to put through the Darwin plant when spare capacity emerges there, also early next decade.

Global consultant Wood Mackenzie estimates that filling the looming spare capacity — which the industry refers to as backfill — at those two projects would provide $US6bn ($8bn) to $US8bn of net present value.

“We think developing the Scarborough field, or developing some of the Greater Gorgon gas fields, through the North West Shelf infrastructure, is competitive in terms of global LNG supply and would be some of the lowest-cost new LNG on the market,” Wood Mackenzie oil and gas ­analyst Saul Kavonic said.

“The key challenge for all of this is the joint venture alignment between the gas owners and the infrastructure owners, not the economics, which look solid.” To develop Scarborough and pipe the gas 300km to the North West Shelf would cost about $US7bn, according to Wood Mackenzie. Citi analyst Dale Koenders has a similar view, estimating a capital cost of $US7.7bn for an operation that supplies enough gas to ­produce 4 million tonnes of LNG a year.

“With the exception of small discoveries adjacent to the existing North West Shelf infrastructure, we see Scarborough as the most economic undeveloped gas discovery in the Carnarvon Basin,” Mr Koenders said.

“We think Scarborough and the North West Shelf almost need each other.”

Citi estimates a $US4.90 per million British thermal unit break-even cost for the Scarborough development. This is about where current depressed spot LNG prices now sit amid the ­current oversupply, but is well below Citi’s long-term estimate of $US9. Woodside agreed to pay up to $US400 million for half of BHP’s 50 per cent stake in ­Scarborough, where operator Exxon is set on floating LNG ­investigations and has shown no enthusiasm for a North West Shelf development.

The price represents about one-fifth the cost, based on resources, that Chinese and Japanese paid to enter the Browse LNG venture in 2012 and one quarter of the cost that Origin Energy paid Karoon Gas Australia in 2014 to enter the Poseidon joint venture, another Darwin backfill contender, in the Browse Basin.

Both those projects now look like less likely developments, at least in the near term, than Scarborough. Wood Mackenzie estimates both the North West Shelf and Darwin LNG projects will have spare capacity from 2021, meaning that investment decisions to keep the infrastructure fully used will need to be made in the next few years.

Woodside, if its BHP deal is not pre-empted by Exxon, is expected to pressure the joint venture to investigate North West Shelf backfill. Sources estimate that developing Caldita-Barossa would cost about $US7bn, with costs added to by the high carbon dioxide content of the fields.

Last month, trade magazines reported that Conoco had called for early construction tenders with a view to the conducting final feasibility studies in 2017.

Industry co-operation will be required to see these fields developed amid competing interests for joint venture partners, particularly at the North West Shelf, where there are six partners.

If industry players cannot align, as they were unable to do at Gladstone when six LNG production trains sharing little infrastructure were built next to each other, state and federal governments may take a more active role in the face of potential lower exports and taxes. “If industry can’t come together to find a solution, they might have a solution imposed on them by government, so that is further motivation to get something done,” Mr Kavonic said. “The North West Shelf is a big asset that is material for Treasury and, post 2021, if it starts going into decline, I suspect that’s not going to be taken too well and political pressure could be brought to bear.”