Western Australia has a lengthy pipeline of prospective oil and gas projects but their size and nature will limit opportunities for local businesses.
Woodside’s announcement earlier this year that it would not proceed with a land-based liquefied natural gas (LNG) development at James Price Point was a defining moment for the industry.
It highlighted the adverse impact of high construction costs, heavy regulation and long approvals processes, which conspired to kill off the James Price Point option.
The decision reinforced a growing consensus that the Australian mainland will not see any more ‘greenfield’ LNG projects for the foreseeable future.
But that doesn’t mean the industry will stop investing or growing.
More than a dozen oil & gas projects off WA’s northern coast could proceed in the next few years, research by Business News has found (see list, next page).
They include ‘brownfield’ expansions of existing LNG plants and, most notably, a wave of floating LNG developments that could redefine the industry.
These projects could potentially be followed by shale gas developments, particularly in the Canning Basin in WA’s north (see page 16).
In the meantime, the construction of seven giant LNG plants in WA, Queensland, the Northern Territory and PNG is continuing to generate work for local engineering firms and other contractors.
In just the past month, Kiewit Australia and Ertech have signed a $296 million joint venture contract for work on the Wheatstone project, Kentz has won a $100 million contract on Ichthys, ATCO has been contracted to supply $100 million of transportable buildings to Wheatstone, and Ausgroup has signed a $34 million scaffolding contract on Gorgon.
Add to this a handful of domestic gas and offshore oil projects, and it’s clear there is plenty of life in the oil & gas sector.
Global context
Looking ahead, industry consultant Wood Mackenzie believes Australia faces a hiatus in new land-based LNG projects.
Head of Australia Upstream Consulting Andrew McManus said high costs are one factor affecting the outlook but there is a lot more at play.
In particular, he said LNG buyers have turned to the United States, which offers potentially lower-cost, more flexible LNG and the opportunity to diversify supply portfolios.
“US supply has become the most favourable near-term option; that is for deals where supply is expected to start pre 2020," he said.
“Opportunities for new Australian projects will be limited, and the high-cost environment will need to be controlled for these projects to be competitive with emerging supply regions. “
Mr McManus said Australia has had a remarkable few years of LNG growth.
“It has gone from contributing seven per cent of global LNG supply in 2000 to an expected 25 per cent of the global market by 2018. It is inevitable that markets like China and Japan, which are major Australian LNG off-takers, may now seek to diversify their supply options."
Brownfield Opportunities
Potentially the largest opportunity for local contractors is the development of a fourth production train at Chevron’s Gorgon LNG project on Barrow Island.
The foundation development, with three LNG production trains and a domgas plant, is budgeted to cost $52 billion.
Chevron has previously disclosed that the 4th train could cost in excess of $10 billion, as it would require the development of new wells and a trunkline as well as the liquefaction plant.
Chevron’s ability to proceed with an expansion of Gorgon’s capacity has been underpinned by the US company’s exploration success.
Its Elfin-1 exploration discovery, announced in April, was its 21st discovery offshore WA since 2009.
Brownfield expansions are also possible at Woodside’s Pluto LNG plant at Karratha and ConocoPhillips’ Darwin LNG plant.
The foundation Pluto plant included infrastructure that was designed to support a second LNG train.
However Woodside has failed to secure sufficient gas, either through its own exploration program or third-party sales.
In its most recent update, released in April, Woodside said there were “no active discussions with other resource owners with regard to Pluto expansion”.
However, Woodside added it was “continuing its efforts in the pursuit of expansion gas and has exploration activities scheduled in the region over the coming years”.
In addition, it is anticipated Woodside will continue to assess third-party supply options, with US company Hess a logical candidate.
Hess has been evaluating development of its Equus gas fields, as a supplier to an existing onshore LNG plant.
The company told US regulators last month that “development planning and commercial activities, including negotiations with potential liquefaction partners, are ongoing”.
“Successful negotiation with a third party liquefaction partner is necessary before the Corporation can negotiate a gas sales agreement and sanction development of the project,” Hess said in its quarterly form 10-Q filing.
ConocoPhillips has its own exploration programs underway off WA’s northern coast, and if successful they could underpin an expansion of its Darwin plant.
The two main options are its Poseidon discovery in the Browse Basin and the Caldita-Barossa gas fields in the Timor Sea.
In both cases, drilling campaigns will help to define the preferred development option.
Floating LNG
The game changer for the industry is shaping up to be floating LNG.
Originally pitched as a niche product for small, stranded gas fields, it is now seen as being more attractive commercially than traditional land-based LNG developments.
That’s because the entire floating gas plant can be fabricated and assembled in low-cost Asian construction yards, taking away the high labour rates and industrial relations issues associated with Australian construction projects.
The loss of Australian construction jobs, and the associated loss of contracting opportunities, explains why the critics of FLNG range from premier Colin Barnett to Australian Manufacturing Workers’ Union state secretary Steve McCarthey.
Mr Barnett had pushed hard for Woodside’s Browse gas to be processed onshore at James Price Point but seems to have accepted the inevitability of a FLNG development.
In a rally at parliament house last week, Mr McCartney described FLNG as economic vandalism.
“We are continuing to see contractions in local manufacturing, we are seeing the hollowing out and deskilling of our economy as our jobs and future are allowed to be sent offshore,” he said.
Shell has been in the vanguard of FLNG. It is currently in the midst of developing its $12 billion Prelude project, which is set to be the first of its kind.
The 488-metre long hull is being built at a shipyard in Korea, the turret mooring system is under construction in Dubai, and the LNG modules are being fabricated at various yards in Asia
State oil company Petronas is running a close second, with its own FLNG development in Malaysian waters.
Woodside chairman Michael Chaney has talked up the potential for FLNG, telling a CEDA conference last week that WA “may well have five floating LNG plants here within the next 10 years”.
He didn’t name specific projects, but Woodside’s Browse is likely to be one of the front runners, after the Perth company struck an agreement to use Shell’s technology.
Woodside chief executive Peter Coleman said FLNG had the potential to commercialise the Browse gas in the earliest possible time, and further build its relationship with Shell.
However, it’s likely to be a couple of years before the Browse joint venture is ready to make a final investment decision.
The Bonaparte project is at a more advanced stage of evaluation.
Jointly owned by France’s GDF Suez and Australia’s Santos, the Timor Sea project already has environmental approval for a FLNG plant with annual output of 2-3mtpa.
The joint venture has engaged engineering firms Technip and KBR to undertake competing evaluations of the project.
A final investment decision is due in 2014.
Another prospective Timor Sea development is Woodside’s Sunrise project, which has been bogged down in long-running negotiations with the Timor Leste government, which has joint control of the development area.
Another potentially larger FLNG development is based on the Scarborough gas field, located 220 kilometres off the coast of Exmouth.
Project operator ExxonMobil applied earlier this year for environmental approval for the project, which would include a vessel 495 metres long and 75 metres wide.
Oil Projects
FLNG projects are in many respects just an expanded version of the floating production, storage and offtake (FPSO) vessels widely used for offshore oil developments.
Many FPSO developments have reached a point where the project operators are undertaking sub-sea developments that allow them to pump more oil though the existing vessel.
A prime example is Santos’ $490 million Fletcher Finucane development, which commenced oil production one month ago.
It consists of a three-well development tied-back to the existing Mutineer Exeter FPSO.
Santos Vice President WA and NT John Anderson said the tie-back would extend the economic life of Mutineer Exeter.
Apache is managing two similar developments, Balnaves and Coniston, also in the Carnarvon Basin.
Another oil project on the cards is Woodside’s proposed Greater Enfield development.
