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LNG projects in trouble

October 14th, 2008 · 2 Comments

We’ve written earlier (here) how falling energy prices and (especially) tighter credit is creating problems building new energy capacity. We also wrote that this can only set us up for more dramatic rises in energy prices in the future, as demand is going to increase. There is a lot more to this story.

The article below doesn’t surprise us at all. We argued that marginal projects would suffer, that is, projects with the least projected returns. If you consider Asia as a more or less single gas market and therefore output prices won’t produce differences in returns, differences can only come from the cost side.

It is here that we have stressed the big advantages of the LNG projects in Papua New Guinea, and the article below underscores these.

It compares some of the Australian coal seam LNG projects with the Exxon-Oilsearch proposed LNG facility, and although there is no mention for InterOil’s proposed LNG facility, the points are the same. Those coal seam gas projects have quite a few substantial cost disadvantages:

  • Many more wells have to be drilled, treated (the gas doesn’t flow by itself) and manned. Up to 20,000, as in the case of the Conoco/Origin project.
  • Labour cost are a fraction in PNG compared to Australia, and the latter has restrictions on the use of foreign (cheaper) labour
  • Something which we didn’t mention, but another disadvantage of these projects in Australia seem to be related to the cost of a carbon trading schemes
  • PNG definitely seems to have important tax benefits

On top of that, an advantage mentioned with respect to the Exxon/OilSearch project is the existence of gas condensates (or liquids), giving returns an extra boost. This could very well be significant for InterOil as well.

If one compares the InterOil project (with partners Merrill Lynch and Clarion Finanz) with that of Exxon/OilSearch:

  • an obvious advantages of the latter is the presence of the deep pockets of Exxon.
  • InterOil’s wells flow much better (just the two of them produce more gas than all of OilSearch wells, and that with small pipes).
  • InterOil’s geographical situation is better, having its gasfield a lot closer to the planned LNG facility in Port Morseby, where it already has important infrastructure in place.

Woodside, Chevron May Delay LNG Projects on Turmoil (Update2)
By Angela Macdonald-Smith

  • Oct. 13 (Bloomberg) — Woodside Petroleum Ltd. and Chevron Corp. are among liquefied natural gas producers in the Australian region that may delay committing to new projects costing more than $70 billion because of lower oil prices and difficulty in raising finance, analysts said.
  • The most-expensive projects, such as Woodside’s proposed Browse LNG and Chevron’s Gorgon off northwest Australia may be worst affected, said Di Brookman, an oil and gas analyst at Citigroup Inc. in Sydney. Most projects not already approved will probably “slide in time,” said Stuart Baker, an energy analyst at Morgan Stanley.
  • Australia is expected to show the biggest growth in LNG production capacity through 2022, according to the International Energy Agency. Inpex Holdings Inc., BG Group Plc, ConocoPhillips and Petroliam Nasional Bhd are among other companies proposing to build more than $60 billion of LNG plants in the country.
  • All these big LNG projects, they all need external financing, debt and equity, and that’s going to be tough,” said Melbourne-based Baker. “Historically the industry had just assumed oil prices would hang in and the money would flood in. Well the game has just changed in the past two weeks.”
  • Perth-based Woodside, 34 percent-owned by Royal Dutch Shell Plc, said last month that the added costs of carbon trading may threaten the Browse project, estimated to cost as much as $30 billion. Chief Executive Don Voelte said last month he was “planning on a different world than what we’ve seen in the past 12 months” because of the financial crisis.
  • Gorgon Delay
  • The company can’t comment further, said Roger Martin, a spokesman.
  • Chevron’s proposed Gorgon LNG project has already been delayed several years. It was first put on hold in 1998 when the Asian economic crisis hit. More recently, the venture, which includes Shell and Exxon Mobil Corp., scrapped a timeline for approving and building the plant as they seek to tackle a surge in construction costs.
  • Chevron’s ventures in Australia are making “good progress,” spokeswoman Nicole Hodgson said in an e-mailed response to questions. Chevron remains committed to Gorgon and the venture has “recently secured an additional A$1 billion ($670 million) in vital funding,” she said.
  • “The Chevron-operated Gorgon and Wheatstone projects continue to make good progress, with both projects ramping up staff and contractor positions as we speak,” she said.
  • Gorgon Costs
  • The Gorgon project may cost A$20 billion, the Western Australian government has said. Australia will account for 16 percent of global gains in LNG output capacity through 2022, the Paris-based IEA estimates.
  • LNG is natural gas chilled to liquid form, reducing it to one-six-hundredth of its original volume, for transportation by tanker to destinations not connected by pipeline. Prices in long-term contracts may be linked to the price of crude oil, which has fallen more than 45 percent since reaching a record $147.27 a barrel on July 11. Chevron owns 100 percent of the separate Wheatstone venture.
  • Australian funding costs eased today after Prime Minister Kevin Rudd guaranteed bank deposits and European leaders promised to shore up lenders, seeking to unlock frozen credit markets.
  • The premium charged to exchange floating- for fixed-rate interest payments in Australia for a period of one year shrank to 84 basis points, the biggest decline since 2002. Rudd said yesterday the government will guarantee all deposits with institutions for the next three years and all “term wholesale funding” by Australian banks operating in international credit markets.
  • PNG `Looks Good’
  • Exxon Mobil’s proposed $11 billion LNG project in Papua New Guinea, due to start shipments in late 2013 or 2014, is one of the best placed, both Brookman and Baker said. The economics of the venture are boosted by a “very attractive fiscal regime” and the volume of condensates, a type of light oil contained in the gas, which will boost profitability, Brookman said.
  • “I think PNG still looks good because you’ve got Exxon there,” Baker said. “After that it gets hard to see where the money’s going to come from. You’ve got the world banking system on the verges of collapse. No-one’s going to rush out and lend $10 billion for a long-dated LNG project.”
  • Onshore LNG projects proposed on Australia’s east coast may be better placed to weather the effects of lower LNG sales prices and tighter credit markets, Brookman said.
  • East Coast Projects
  • Projects such as those proposed by Petronas and Santos Ltd., ConocoPhillips and Origin Energy Ltd., and BG and Queensland Gas Co. have higher rates of return than some of the ventures in Western Australia that require the development of distant offshore fields and lengthy pipelines and have to pay higher royalties, she said. Queensland Gas gained as much 28 percent in Sydney trading today, after slumping 38 percent last week.
  • Still, even the east coast projects may be re-examined, Morgan Stanley’s Baker said.
  • Any delays in project approvals will push out a forecast shortage of LNG supply beyond a current estimate of 2015, Brookman said.
  • “If we have any slippage in a lot of the projects that are earmarked at the moment then we’ll continue to have that shortage for longer,” she said.

We also wrote an article about Chesapeake, which is also curtailing capex spending. Cutting back on LNG and/or gas plans is by no means restricted to Asia, in fact, it should be one of the last places LNG plans would be cut because Asia is much less affected by the credit crisis and gas trades at very high premium prices.

In short, we don’t fear that InterOil will be one of the marginal projects, it’s economics are very compelling. If other projects falter, that only increases the economics for InterOil’s LNG facility, as it makes LNG in the future more scarce. What they need is an Exxon though.

Tags: IOC · Natural Gas

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