Australia LNG Boom Threatened by U.S. Shale Exporters
Australian liquefied-natural gas projects planned by companies from Royal Dutch Shell Plc (RDSA) to Woodside Petroleum Ltd. (WPL) and valued at about $100 billion are at risk from rising costs and cheaper U.S. exports.
Natural gas trading at a 10-year low in the U.S. and discoveries in Africa also threaten to slow the development of Australian LNG ventures following the approval of eight projects to meet surging demand from China, Japan and South Korea.
Shell’s Arrow Energy Ltd. venture with PetroChina Co. (857) may need to join with a competitor in the northeastern state of Queensland rather than develop its own LNG production plant, said David Heard, a Bank of America Merrill Lynch analyst in Sydney. Perth-based Woodside and its partners in the Browse LNG project may ultimately choose to feed their gas to an existing venture in Western Australia, Macquarie Group Ltd. said.
“You’ve got potential for LNG exports in all sorts of places, but the elephant in the room is North American exports because they’re very likely to be cheaper,” Noelle Leonard, a FACTS Global Energy consultant, said in a telephone interview from Perth. “We’ve probably come to the end of greenfield projects in Australia,” a reference to new plants on undeveloped land.
Arrow and Woodside said they’re sticking with their plans for new plants, although Woodside is seeking to delay Browse. The Arrow project would cost more than $20 billion, while Browse may cost as much as $46 billion, Deutsche Bank AG estimates.
Australia, taking advantage of its proximity to Asia, is home to more than 70 percent of LNG projects under construction worldwide, putting it on course to surpass Qatar as the largest exporter of the fuel by the end of the decade, Sanford C. Bernstein & Co. said in February.
Australia and Qatar sell the commodity to Asia at prices linked to oil. Buying gas from the U.S. will allow Asian consumers to pay prices tied to Henry Hub futures, which tumbled 32 percent last year amid record output driven by extraction from shale.
Cheniere Energy Partners LP (CQP) estimates the cost to deliver gas from its proposed Sabine Pass terminal in Louisiana to Asia at about $9.90 per million British thermal units, based on Henry Hub prices at $4, plus capacity fees, shipping costs and fuel.
Japan, the world’s biggest buyer of LNG, paid a record average price of $16.96 per million British thermal units in November. The cost of the cargoes delivered to Japan in February was 65,552 yen a ton ($799), up 27 percent from a year earlier, according to the finance ministry. That’s equivalent to about $15.36 per million Btu.
Woodside, Australia’s second-biggest oil producer, is seeking government approval to delay Browse until 2013. The company must decide whether to go ahead with the LNG development by mid-2012 under the government’s “use-it-or-lose-it” policy for oil and gas resources.
An alternative to building the Browse plant at the James Price Point site in Australia’s Kimberley region is to send gas to the Woodside-led North West Shelf LNG development, said Adrian Wood, a Sydney-based analyst at Macquarie Group.
“It would be a positive for Woodside’s investment case if management said James Price Point is frankly too much risk for too modest a return,” Wood said by phone.
Woodside’s shares have slumped 26 percent in the 12 months through April 3, more than the 11 percent drop in the Bloomberg World Oil & Gas Index. (BWOILP) The Australian energy company fell 0.2 percent to A$35.28 in Sydney, compared with the benchmark S&P/ASX 200 Index’s 0.2 percent gain.
Woodside hasn’t changed the plan to build the processing facilities at the proposed site near James Price Point, the company said in a March 26 e-mail response to questions.
The eight projects under development in Australia have a planned production capacity of almost 70 million tons a year.
The nation has further plants or expansions with annual capacity of about 60 million tons that are possible or speculative, Bernstein said. That’s almost a quarter of the potential additional supply globally, according to the report.
Australia, facing the prospect of increasing supply from places including the U.S., Canada, Mozambique and Russia, also must contend with rising labor and material costs. Woodside last year increased the estimated cost of its Pluto venture for a third time in 19 months to A$14.9 billion ($15.5 billion).
The threats of increasing supply competition and rising construction costs in Australia will probably lead developers to consider sharing infrastructure and processing facilities or supplying gas to existing projects, Heard of Merrill Lynch said. Arrow may seek to acquire a stake in an expansion unit with a rival such as Santos Ltd. or sell its gas to one of the ventures already advancing on Curtis Island, he said.
“We’ll see commercial compromise,” Heard said in a phone interview.
Brisbane-based Arrow plans to decide in late 2013 whether to develop an LNG export project in Queensland, the company reiterated in an e-mailed response to questions. Arrow, the coal-seam gas producer acquired by Shell and PetroChina in 2010, bought Bow Energy Ltd. last year for A$535 million, gaining more resources to support the planned development.
Arrow’s venture does have an advantage over other proposed projects in Australia. Parent companies Shell and PetroChina have agreed to acquire 100 percent of the LNG from the proposed development, Arrow said in the March 30 e-mail.
To be sure, suppliers such as Origin Energy Ltd. (ORG), ConocoPhillips’s partner in the Australia Pacific LNG project approved last year, have said they expect Asian demand will be strong enough to support future Australian and U.S. ventures.
“The real question is, ‘What’s the risk?’” Grant King, managing director of Origin, said in a Feb. 23 interview in Sydney. “You’d need to be very confident that U.S. prices will remain below $6 long term, and that would be a big call to make. We will see some exports from the U.S., but we don’t think the volume would overwhelm demand for LNG.”
Among other potential LNG ventures in Australia are Woodside’s Sunrise development and Santos’s Bonaparte project. Sunrise may cost about $13 billion, Deutsche Bank said in a March 23 note. The report didn’t give a Bonaparte estimate. Gas resources held by Conoco and Karoon Gas Australia Ltd. (KAR) may support a A$20 billion LNG project, according to Deutsche Bank.
“Arrow, Browse, Bonaparte LNG have all been identified as projects the proponents would like us to seriously consider,” Heard said. “All of those might struggle at least until there is softening in cost inflation and bottlenecks.”
Woodside plans to expand Pluto, while Chevron (CVX) wants to increase capacity at its A$43 billion Gorgon venture off northwest Australia. BG, Santos and Origin also may expand their projects on Queensland’s Curtis Island.
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