MELBOURNE (Dow Jones)
More than US$100 billion of Australian, Timor Sea and Papua New Guinea liquefied natural gas projects are planned over the next decade, but a severe labor shortage and surging costs mean many projects won't go to schedule, keeping global supply tight.
There are plans for 17 new projects, and if all go ahead LNG output from the region will surge sevenfold within 10 years to 117 million metric tons a year - the energy equivalent of 2.85 million barrels a day of oil or one third of Saudi Arabia's 2007 oil output.
But there's scant chance of this due to surging material costs and a boom-driven labor scarcity in Western Australia state - a problem BHP Billiton (BHP) Petroleum Chief Executive Michael Yeager last week said was the worst globally aside from possibly in Alberta's oil sand fields.
Instead, the region's output might fall well short of half its potential.
The rush to produce more LNG - natural gas cooled to liquid state so it can be moved in tankers - comes as global demand for the fuel is set to surge threefold to over than 500 million tons a year by 2030, according to Exxon Mobil Corp. (XOM) forecasts.
As well as growth in global energy use, demand is being boosted by the attraction of fuels that emit less greenhouse gases than coal and oil.
"Australia should play a key role in meeting supply, but at the moment the industry is failing to meet the call," said Mark Greenwood, a Sydney-based energy analyst with JPMorgan.
"There's more projects than there are people to build them and that's the main reason why we don't see them all getting up," he said, adding some company boards are also balking at the huge capital costs now needed. "Given those constraints, it looks like LNG prices are going to remain firm for a very long time," he said.
Asian LNG spot prices are around $15 per million British thermal units, a far cry from the $3/MMBtu locked in earlier this decade by Chinese customers of Australia's first LNG project, The North West Shelf.
Asian demand is also influencing U.S. spot prices, which rose 45% to $8.29/MMBtu in January, from $5.71/MMBtu in October, according to the U.S. Energy Department.
The Australian Petroleum Production and Exploration Association, an oil and gas lobby group, has laid down what it calls an "aspirational" target of tripling the country's LNG output to 50 million-60 million tons a year by 2017, while Australian Resources and Energy Minister Martin Ferguson said Australia could be exporting 60 million tons a year by 2015.
Even though these targets don't cover all planned projects, they were shot down last week by Woodside Petroleum Ltd. (WPL.AU), Australia's biggest independent oil and gas producer and the operator of four planned projects.
"I don't think it is physically possible to build all that stuff," Woodside Chief Executive Don Voelte told reporters in Perth, citing labor and equipment constraints.
"It is my considered opinion that (tripling of Australian LNG output) is not an aspiration, it is not even a dream - it is impossible," he said, adding doubling is more likely in that timeframe.
Australia produced 15.1 million tons of LNG from just two projects in 2007; the Woodside-operated North West Shelf venture, on the northwestern coast of Western Australia state, and ConocoPhillips' (COP) Darwin LNG plant, which processes gas from the Timor Sea.
A North West Shelf Train Five expansion is due to add 4.4 million tons a year capacity to this in the first quarter of 2008.
Given that the projects off the coast of Western Australia Woodside is involved in will more than double Australia's current output, Voelte's expectations leave little room for others.
Along with the Shelf's Train 5, Woodside is now building the only other board-approved LNG facility in Australia: the A$12 billion Pluto project next door on the Burrup Peninsula. The first processing unit, or train, of this is expected to add 4.3 million tons a year of LNG from 2010.
Perth-based Woodside is also planning to add about 15 million tons a year of production from the massive Browse project, offshore Western Australia, which analysts expect to cost more than A$20 billion, and another 5 million tons a year from the Sunrise project in the Timor Sea. Both await final design decisions and board approval.
Tripling May be Optimistic
JPMorgan's Greenwood agrees with Voelte that doubling rather than tripling LNG output is more likely, but says it won't necessarily be all the Woodside projects that get up.
Chevron Corp. (CVX) is expected to provide serious competition for resources as it looks to develop its 15 million tons-a-year Greater Gorgon project and its smaller Wheatstone project. Both are off Western Australia.
Gorgon is the biggest of the planned LNG projects, and one of the best examples of the hurdles being faced, with its owners having been discussing the best route to development since it was discovered in 1981. If it goes ahead, there will be further expansions in the cards, and it will be Australia's most expensive development.
Estimated start dates for Gorgon were pushed back from 2000, and the most recent official cost estimate, from 2005, stands at A$11 billion.
Chevron has stopped giving public cost and startup date estimates, but analysts say the complex development, which involves the world's biggest carbon dioxide geosequestation project, will cost over US$25 billion and not start until at least 2015.
Most of the region's new projects, including Gorgon, Train Five, Pluto, Wheatstone and Browse plan to use gas from the Carnarvon or Browse Basins, both off the northwestern coast of Western Australia state.
In the Browse Basin, where so far there has been little development, state and federal governments are proposing restricting LNG plant developments to a central hub, which has worried some producers given a lack of detail on who would operate it.
The talk has led Inpex Holdings Inc. (1605.TO) to push back the start date on its 8 million tons a year Ichthys project to 2013 and to consider processing the gas in the northern Australian city of Darwin, 900 kilometers away.
Meanwhile, on the other side of Australia, near the port town of Gladstone in Queensland, a new LNG region has sprouted in the last two years. Removed from the severe shortages in Western Australia, it may have a better chance of making good on planned production.
There are now four separate proposals to produce LNG from onshore coal seam gas in the area, including a A$7.7 billion plan from Santos Ltd. (STO.AU) that is expected to produce 3 million-4 million tons a year.
BG Group PLC (BG.LN) and Queensland Gas Co. (QGC.AU) are planning a similar-sized venture, and two smaller projects, of around 1 million tons a year, are planned.
Also a fair way from the tight Western Australian construction market, Exxon Mobil Corp.'s US$11 billion PNG LNG project in Papua New Guinea, also has a strong chance of going ahead on schedule.
Planned LNG projects in Australia, Papua New Guinea and the Timor Sea:
Project Operator Location Output Cost Start
NWS 5 Woodside Carnarvon Basin 2.4 A$2.4 2008
Pluto I Woodside Carnarvon Basin 4.3 A$12 2010
LNG Ltd LNG Ltd. Gladstone 1.3 A$0.7 2011
Pluto 2 Woodside Carnarvon Basin 4.3 ? 2012
Sunshine Sojitz Gladstone 0.5 A$0.5 2012
Gladstone Santos Gladstone 3-4 A$7.7 2013
Onshore BG Group Gladstone 3-4 A$8 2013
Wheatstone Chevron Carnarvon Basin 5 ? 2013*
Ichthys Inpex Browse Basin 8 US$10 2013
Sunrise Woodside Timor Sea 5 ? 2013
PNG LNG Exxon PNG 6.3 US$11 2013-14
Browse Woodside Browse Basin 15 A$20* 2013-15
Abadi Inpex Timor Sea 3-5* US$4* 2014-16
Gorgon Chevron Carnarvon Basin 15 A$25* 2015*
Darwin 2 COP Darwin/Timor Sea 5-6 US$10 2015+
Scarborough Exxon Carnarvon Basin 6* ? 2017+
Prelude Shell Browse Basin 3.5* ? ?
*Analyst's estimate, not issued by company.
Output figures are in million tons a year.
Costs are in billions of dollars.
Copyright (c) 2008 Dow Jones & Company, Inc.