Finally some truth about LNG excess

ScreenHunter_18 Feb. 11 10.19

For the past year or so I’ve been playing a lone hand in assessing the local LNG boom as something of a  bubble. Although the AFR doesn’t use that terminology, it’s edges that way today:

The petroleum industry has lost several chances to put common sense ahead of ego, with Gladstone’s Curtis Island a case in point.

…UBS analyst Nik Burns estimates the $70 billion combined cost of the three could be $10 billion to $15 billion lower had consolidation happened three years ago.

…The lure of leading flagship projects was just too much. For both Santos and Origin Energy, their respective LNG ventures will transform their position on the world stage. BG Group wanted to run its own project too.

The story goes on, effectively declaring Arrow LNG dead:

Looking at Citigroup’s estimates of the cost curve for the projects, that is no surprise. It calculates that Arrow would need an LNG price of $US15 per million British thermal units to achieve a 12 per cent rate of return.

Few around expect that to be achievable for new projects.

A third train at APLNG could be fed only partly by gas from Arrow, avoiding aggressive drilling early on in Arrow’s acreage, which is embroiled with issues around landholders and Queensland’s strategic cropping land policy. The rest could be provided from existing APLNG acreage, allowing flexibility to select the most efficient gas supplies.

In a separate story, the AFR recounts more UBS’s analysis:

Australia’s high-cost environment is casting doubt on $156 billion of liquefied natural gas projects that “should” go ahead, according to UBS energy ­analyst Nik Burns.

Mr Burns told an energy round table on Thursday that LNG project proponents’ concerns about costs in Australia posed a threat even to brownfield expansions and those with a high ­liquids content that usually would be viable and proceed.

Sure, if we cared about competitiveness. But we don’t so they shouldn’t and won’t until we do.

David Llewellyn-Smith
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  1. I have followed coal seam gas for probably 35 years from when I worked as a surveyor for seismic exploration companies working in the Cinchilla -Goondoowindi area, and having been an original share holder in Sunshine Gas. This is my take on the Bubble.
    It has always been known there was coal seam gas in the region of the Condamine River, at places you can see it bubbling to the surface. An early promoter of coal seam gas as a commercial energy source was Sunshine Gas. I went to their share holder meetings and they had all sorts of numbers on the size of the resource, but they were uncertain of the well flow rates and the rate of draw down one the gas was tapped.
    The coal seam gas explorers were consoloditated, Queensland Gas etc, then along came BG group.
    They were so keen to get a hold of the acreage and make big profits that at least 2 of the directors of BG Group were convicted by Queensland Courts of insider trading and at least one went to jail.

    BG group wished to be the first, biggest and the best, and it is my opinion that common sence of the commercial reality went out the window. “The lure of leading flagship projects was just too much. For both Santos and Origin Energy, their respective LNG ventures will transform their position on the world stage. BG Group wanted to run its own project too.”
    What is going on at Gladstone is a first class example of a bubble, up there with Tulip Mania and the South Seas Schemes of the past.WW

    • And: As you will have noticed from the just announced closure of the QANTAS maintenance facility at Avalon Vic, when the specialised mechanical and electrical workers become laid off from these projects, at the moment, they have nowhere to go.
      The workers therefore have every incentive to milk the job from here on in, thus making a conclusive final cost and date for the projects a real moving target.
      These projects are juvenile white elephants. WW

      • I know a few (3 actually, personally) ex-Qantas maintenance trades working on LNG plants earning 350-400k as turbine specialists.

    • WW,

      I’m not so sure that a “bubble” is a fair description of the gas plants that are being built. To be sure they are very expensive compared to the gas plants that were built even only 5 to 6 years ago, but then to be fair they are now not that much more expensive than other gas plants that could be built in other locations around the world. Gas plants, as with any major piece of capital plant, is much more expensive now than 5 to 6 years ago, no matter what the location or what the raw material/process. One of the unrecognised factors when we look at oil and gas project costs in Australia is that we are all too often comparing Australian project costs who sits on the +20% project cost line with the most efficient oil and gas project delivery system in the world, that is of course the US. No other country comes close. The US sits on about the -20% project cost line and is at least 10% ahead of any other country and typically at least 20% ahead of most other countries.

      So we are getting expensive LNG projects in Australia, but there are not many other LNG projects being built around the world at the moment. A lot being talked about but not much actually being constructed and able to deliver additional LNG capacity to an increasingly energy hungry world in the timeframe of the Australian LNG projects.

      A bird in the hand is worth two in the bush. And this may be true for even an expensive bird.

      • I tend to agree. These projects will be delivering gas when others are just getting under construction (and possibly not as many as currently mooted) – there is real potential that those entering agreements for NA gas find themselves caught in an under supply situation and have no alternative other than to purchase spot at premium prices from guess who…