In just a few months’ time, Australia will become the world’s largest LNG exporting nation – a true LNG superpower.
No nation has ever attempted to stand up 10 LNG projects consisting of 15 LNG trains at the same time, and likely none ever will again.
Australia leads the way with a diverse range of project configurations and future possibilities.
Diverse and innovative
Broadly, Australia taps two different gas resources using four different LNG project configurations. In Western Australia and the Northern Territory, the sector extracts gas principally from offshore fields, and transports the gas to shore where it is treated and liquefied.
In Queensland, three innovative coal seam gas projects extract dry methane from shallow coal measures, and transport the gas to the coast for treatment and liquefaction.
In addition, the industry is pioneering two hybrid models. One project will also tap offshore gas fields, but will separate liquids at a floating production vessel, with the residual methane treated and liquefied in Darwin. The other is the highly innovative floating LNG facility, a world’s first, that will treat gas and manufacture LNG entirely at sea.
Commercially, Australia’s LNG projects have strong underpinnings. All have largely sold gas forward on long off take agreements to large credit-worthy customers on terms based on oil indexed pricing. Those same customers are frequently investors in the projects to help align interests.
The demand outlook for gas remains promising, with growth rates expected to be at or above global gross domestic product growth rates. But the country no longer has the market to itself, with abundant US supplies, unlocked by technology innovations like horizontal drilling and multi-stage fracture stimulation, shortly coming to the market.
Australia’s LNG industry has encountered a number of challenges – including some of the highest costs in the world, low productivity and significant social license concerns.
Studies show Australia leads the world in capital costs, driven by a small available working population, remote project sites far from settlements, long transportation supply routes and a demanding regulatory burden.
Hand-in-hand with high costs is the low productivity of the workforce, which is tied to restrictive work practices and high levels of compliance-related activity.
It’s also proving difficult for the industry to earn and maintain high social licence to operate. The political environment translates to an unstable regulatory environment, with frequent rule changes for gas projects. High levels of social activism also block project approvals, drilling activity and other legitimate gas industry business.
Coincident with the drop in oil prices, which has caused a fall in eventual LNG revenues, the Australian dollar has also fallen relative to the US dollar. This has helped lower the cost of inputs such as labour and logistics, and has helped offset these challenges.
The immediate agenda
In the midst of many global and local forces, challenges and opportunities, the agenda for the Australian industry over the next 24 months is largely set.
There is still considerable build activity in Western Australia and the Northern Territory that must come to a successful conclusion.
Transition to operations
Confidence in the coal seam gas projects is growing, with the successful launch of the QGC project and its transition to operations.
The remaining Queensland projects anticipate the same success, and this experience will eventually benefit the WA projects also.
Take costs out
While Australia’s costs have come down significantly, they still have to move further.
Suppliers and employees should expect a ruthless and relentless cost emphasis, the only variable the projects can control.
The projects are racking up a small but successful track record in collaboration, including safety forums, emergency preparedness, and shutdown and turnover planning and execution. But there are still ample opportunities for greater collaboration to take out cost and improve productivity.
So long as oil prices remain low, few greenfield LNG projects, including those in Australia, are likely to be sanctioned. This is therefore setting up the country’s 10 projects as viable competitors for brownfield expansion.
The focus on completing the projects has limited interest in innovation that might prove too disruptive to capital execution. Expect to see the innovation agenda rise in importance.
Many innovative technologies have yet to establish a significant presence in the industry, including virtual reality, the sharing economy, and the internet of things.
The industry should also soon be undertaking more aggressive capital recycling programs. Many of the gas processing assets in the on-shore value chains, including the plants, water treatment facilities and pipelines, could be spun off to third party operators. This would free up capital to finance expansion of the gas fields to grow the sector.
Finally, the overall industry will be seeking a significantly lower regulatory burden, and Australia’s various governments should be stepping up to assist. While suppliers, owners and operators will do their best to improve sector economics, the regulatory burden and related compliance costs are a direct charge against the slim royalties governments need to finance public sector debt, operations and social programs.
Australia will be the world leader in the LNG sector and has bright and exciting prospects as it races to conclude the immediate slate of development.