Thursday, 11 April 2013
SHELL has been blamed for upsetting Woodside Petroleum’s plans for an onshore processing component at the Browse LNG project in Western Australia but from what Slugcatcher* saw last week the killer blow came from outside the Browse joint venture and was delivered by ExxonMobil.
 |
|
|
|
An early impression of the Scarborough FLNG vessel during unloading operations |
 |
|
|
|
ENB's infamous Slugcatcher |
Without fanfare and through the simple lodging of a 79-page document with the Australian government’s environment department, the Australian arm of ExxonMobil set the clock ticking on the country’s second floating LNG barge.
By asking for permission to develop the long-dormant Scarborough gas field using FLNG technology Esso Australia Resources has followed Shell, which is already building a “floater” for its Prelude LNG project.
Two FLNG projects is not a stampede but when the world’s two biggest oil companies decide FLNG is the way of the future in offshore Australian gas field developments then it is possible to say a tipping point has been reached.
Woodside and its champion, the recently re-elected WA Premier Colin Barnett, may prefer to stick with plan A and build a conventional offshore project connected by pipeline to a big onshore processing centre at James Price Point on the Kimberley coast but they are now fighting more than environmental objections – they are fighting a period of historic change.
Over the past few months Shell has drifted further away from the onshore Browse proposal, just as major shifts have been occurring in multiple areas of the LNG business, including engineering design, the financial structure of the global LNG industry and the hostile Australian investment climate.
There is not much else to say about Australia’s high internal costs, skills shortages and difficult government approval processes.
There is a lot to be said though about the financial structure of the LNG business and the speed at which engineering and design solutions are developing.
Both of those issues have to be considered even if most oil and gas people shun the financial aspect of their industry.
To prove the point about financial ignorance, ask why has there not been more said about Japan creating the world’s first futures contract for trading in LNG?
Obscure, perhaps but deeply significant because it is a big step towards creating a global market in LNG in exactly the same way there is a global market in oil, iron ore, gold, or just about any other commodity.
LNG, after its early decades as a closed loop energy source with dedicated ships plying the same route in perpetuity between a source of supply and an offtake point in Europe or Japan, is rapidly becoming a business similar to oil, with a cargo heading off to where it can fetch the highest price.
Because Japan is the world’s biggest LNG buyer – and getting bigger in the wake of the Fukushima nuclear reactor meltdown – it is keen to drive down the price of liquefied gas.
Creating a futures market is an important step in that process.
The big boys of world oil, who are also the big boys of world gas, can see what is coming.
That is an LNG future that looks awfully like the oil industry of today and one where special deals to keep prices high in order to justify an investment decision cannot survive.
Back in 1980 when the original LNG sales were booked between Woodside and its partners with Japanese power utilities they were on terms that locked the producer and the customer into a closed loop contract.
It prevented Woodside from shopping extra cargoes around without Japanese approval.
Today, LNG is becoming a free market and that means the producers have to become far more cost conscious.
That, in turn, means gold-plated LNG projects, such as the $50 billion monster that is the Gorgon development and the proposed $40 billion Browse project, are effectively LNG dinosaurs even before they are operational.
FLNG is not only a cheaper option – it will be more profitable, flexible and far from the problems of trying to do business in the high-cost Australian domestic market, which also comes wrapped in union militancy.
For Woodside chief executive officer Peter Coleman there is the frustration of being seen to favour the onshore Browse LNG option while his old firm, ExxonMobil, signs up for a Prelude-like floater.
Coleman’s options are narrowing as the LNG market evolves and rivals invest in cheaper options than what he currently has.
That is unless he can steer the Browse partners and the WA government towards an even more profitable option than FLNG for Browse – a long pipeline to the Burrup processing centre.
While not favoured by the government, that pipeline option, according to a study last year by investment bank Goldman Sachs, claimed delivering gas to an expanded Burrup would produce a return of 19.5% on capital invested.
By contrast, onshore Browse LNG delivered just 12.6% and Browse as an FLNG delivered 14.8%.
By tossing its hat into the FLNG ring for the Scarborough project ExxonMobil has turned the spotlight on the critical question of costs and profits, just as Japan moves to make LNG a freely traded commodity.
|
