SIX years ago a consortium planned to pipe gas from Papua New Guinea across the Torres Strait to Queensland to fill a looming gas shortage in eastern Australia. That was before a gas revolution transformed Queensland itself. The volume of gas drilled from coal seams under the state has more than quadrupled since then. A consortium including BG Group of Britain is due to ship the world’s first exports of coal-seam gas, chilled and condensed into liquefied natural gas (LNG), to Asia next year. Santos and Origin Energy, two Australian companies, will follow.
Australia’s gas boom has prompted forecasts that it will overtake Qatar as the world’s biggest LNG exporter by 2020. But the rise of North America and east Africa as potential rivals and the soaring costs of building liquefaction plants in Australia now worry its gas investors. Until recently the country produced only small quantities of gas, from conventional wells under the Indian Ocean. Now new technology is opening up unconventional reserves, in coal seams, shale beds and elsewhere , which were once thought too costly to exploit. Australia’s gas reserves have risen in rank from 15th in the world five years ago to 11th, according to BP.
If the ranking seems modest, Australia’s closeness to hungry gas markets in Asia sheds a different light. Australia’s LNG export earnings, A$12 billion ($11.1 billion) in the past fiscal year, are expected to be five times that size by 2017-18. The government’s Bureau of Resources and Energy Economics says LNG will then replace coal as Australia’s second-biggest export earner (it is fifth now), beaten only by iron ore. About A$200 billion is being poured into building seven plants to convert gas to LNG; three others are already operating.
Graeme Bethune of EnergyQuest, a consultancy, likens this in scale to the bail-out of a European country: “Except it’s private money doing positive things.” Roy Krzywosinski, managing director of Chevron Australia, wonders, though, if Australia can ride a second investment wave “before our competitors catch up”.
A report by McKinsey, a management consultant, warns that the odds could be stacked against Australia. The cost of building new LNG projects there has risen “tremendously”, making it up to 30% more expensive than projects in North America and east Africa. Michael Rennie, McKinsey’s head in Australia, says the country is the first LNG producer to “hit a cost wall”.
Some of the biggest projects have run into trouble. Woodside, a domestic firm, announced in April that it was ditching plans to build a plant on the Kimberley region’s pristine coast in Western Australia to process gas from its offshore Browse Basin project. Cost played a big part, as did protests by environmentalists. Chevron revealed earlier that the cost of its monstrously large Gorgon LNG project off Western Australia had risen by about a fifth, to A$52 billion.
For most operators, the chronically high Australian dollar has driven up construction costs. Skills shortages, and remote locations for most projects, have made labour costs soar. A recent survey of 53 countries found that Australian oil and gas workers earned an average of $163,600 a year, almost double the global average. But the energy groups behind the three big projects to convert coal-seam gas to LNG have made things harder for themselves. They are building the plants side-by-side at Gladstone on Queensland’s coast, yet they have wasted perhaps billions of dollars by failing to share facilities.
Peter Voser, the boss of Shell—which is a partner in both the Browse Basin and Gorgon projects and also produces coal-seam gas in Queensland with PetroChina—admits there are “significant challenges” for doing business in Australia, but he remains optimistic. Mr Voser reckons demand for LNG will double in this decade. Shell plans $30 billion of investments in Australia over the next five years.
For Prelude, another of its Western Australian projects, Shell is building a huge floating plant to liquefy gas from under the seabed. The vessel, moored 475km (295 miles) offshore, will start producing in 2017, and remain there for 25 years. Exxon Mobil and BHP Billiton, Australia’s biggest company, recently hinted at a similar venture. By eliminating pipelines and other onshore costs, floating LNG production may prove the blessing Australia needs to stay in the gas game