Australia's natural gas players, keen to increase their presence in world liquefied natural gas trade, see Asia as their major LNG market in the decades to come.
That's despite the fact that two Spot cargoes of Australian Northwest Shelf LNG were shipped to Europe during the last 12 months and more are likely in 1994.
Opportunities for growth are foreseen within the confines of the existing Northwest Shelf gas project for the rest of the 1990s. But the main focus for potential new grassroots project developers and expansions of the existing LNG plant in Australia is the expected shortfall in contract volumes of LNG to Japan, South Korea, and Taiwan during 2000-2010.
Traditionally the price of crude oil has been used as a basis for calculating LNG prices. This means the economics of any new 21st century, supply arrangements are delicately poised because of the current low world oil prices, a trend the market believes is likely to continue.
In a bid to lessen the effect of high initial capital outlays and still meet projected demand using LNG from new projects and expansion of the existing plant, Australia's gas producers are working toward greater cooperation with prospective Asian buyers.
SPOT CARGOES
The surprise sale of two cargoes of Northwest Shelf LNG to Spain in 1993, both of which were 20 year contracts with Japanese Northwest Shelf LNG buyers, came about through the dual circumstance of a downturn in the Japanese economy and production problems at an LN& plant in Algeria.
Although the Japanese LNG market is still growing the rate of growth slowed a little last year, and the Woodside Petroleum Pty. Ltd. operated LNG complex on Western Australia's Burrup Peninsula found it had unplanned spare capacity. The Northwest Shelf partners were faced with the prospect of Tailing up one of the seven dedicated LNG vessels - the eighth is due in service at yearend 1994 - for a short time or securing several spot cargoes.
The market niche was fined when Enagas of Spain asked for two cargoes following production problems from its usual supplier in Algeria. South Korea also found it needed a cargo, and this became the third noncontract delivery.
Looking ahead the next 12 months, the Woodside group believes there still will be potential for spot sales of its LNG in Europe because of continuing problems with Algerian production. Spain has expressed interest, and there is some prospect of sales to Belgium and Italy, both of which normally rely, on Algerian cargoes.
It also is probable that South Korea and Taiwan will be looking for spot cargoes the next 2-3 years, and the Northwest Shelf project may be in a position to meet some of those needs.
However, by 1995 the Woodside group will have reached its plateau level of supplying 7 million metric tons/year of LNG for its contract Japanese customers, and ability to meet spot sales opportunities may be out of reach with the three existing LNG trains in the Burrup Peninsula plant.
The next step is to look at the potential for plant expansions, and this deals with the broader aspects of world LNG market potential after 2000.
LNG MARKET POTENTIAL
LNG currently accounts for 24-30% of the world's gas trade. Demand for LNG has grown at an average 20%/year since 1970. LNG is expected to be the fastest growing segment of the natural gas market through the rest of the 1990s and into the first decade of the next century.
The conservative outlook is for world LNG demand to be about 94 million tons by 2000 and about 130 million tons by 2010. The high side forecast for 2010 is closer to 150 million tons.
For Australia, Asia is still the main demand center.
Most analysts believe there will be a shortfall of LNG under contract to Northeast Asia by 2000 of 3-10 million tons/year. The Australian government's Department of Resources Development suggests that the current total imports of LNG by Japan, South Korea, and Taiwan of 13.3 million tons/year could rise to 64-73.5 million tons/year by 2000. The department predicts a further rise to 80-101 million tons/year of LNG imports by the region by 2010.
Elsewhere in Asia, China is also likely to become a potential buyer at the turn of the century. Thailand is considering the prospect of LNG imports about the same time, and India has put out feelers for construction of substantial new power generation capacity with LNG as a potential fuel source.
In addition, the prospects for LNG can only be enhanced by the growing world environmental push for cleaner burning fuels.
AUSSIE LNG PROSPECTS
Given this scenario of mushrooming demand in the Asian region, several Australian projects have a chance to become LNG suppliers during the early part of the next century. What's more, because of the long for such projects, the pressure is on the various project negotiators to clinch the deals as soon as possible.
Since 1989, all increases in demand for LNG have been satisfied via expansions of existing LNG production units. Continuation of that would make the Northwest Shelf project a frontrunner in the chase for Asian LNG markets. Project participants have room and incentive to build a fourth and even a fifth LNG processing train on the Burrup Peninsula.
However, there also is room for other grassroots hopefuls. They include the Bonaparte Gulf project, which involves Petrel and Tern fields and is operated by Santos Ltd. and the three company Japanese group Bonaparte Gas & Oil, and West Australian Petroleum Pty. Ltd.'s (Wapet) Gorgon fields complex west of Barrow Island.
In addition, there have been several recent gas discoveries in the Carnarvon basin off Western Australia such as East Spar/Maitland by Western Mining Corp. and Ampolex Ltd. and Pyrenees and Macedon, formerly identified as a single field known as West Muiron and found by BHP and Ampolex.
Under a slightly more distant timeframe, there also are large gas reserves in Esso/BHP's deepwater Scarborough field on the Exmouth Plateau and in the Woodside group's Browse basin fields about 280 km from the northwestern coast.
AUSSIE LNG ECONOMICS
It is generally accepted that LNG remains the most likely opportunity to export large volumes of gas from.Australia and to establish a single train LNG plant would require about 2 tcf of gas reserves. But reserves in the ground are one thing. Obtaining an LNG price that makes them economic to develop is quite another.
BHP has pointed out that in a recent cost analysis of grassroots LNG projects, the results suggest a 40% reduction in conventional costs would be required to achieve an acceptable return on capital. The viability of expansions to existing plants depends on a similar cost reduction.
Would-be producers need market opportunity and an acceptable price before they can commit to the expense of exploration to prove required reserves needed, then build or expand an LNG plant. Traditionally, proved reserves are needed before detailed negotiations with prospective buyers can take place. And so a vicious circle is formed and perpetuated.
The major stumbling block in the equation is that LNG prices are linked to the price of oil. Several potential projects around the world - Sakhalin Island, Alaskan North Slope, and western Canada, among others - have been stalled for a decade because oil prices - and thus the potential LNG price - have been too low to permit economic development.
Now, Australia's gas producers are trying to unhook LNG's price from the price of oil and at the same time find a way to reduce upfront costs of their projects by obtaining some form of early agreement or precommitment from LNG buyers. In short, they are trying to lessen competition with other fuels and bring exploration/development costs closer to the cash flow that comes with gas delivery.
For it to work, the process needs close cooperation between buyers and sellers. It means the Australian producers must keep potential buyers fully informed of every detail of their geological prospects, exploration and appraisal programs, and development ideas. Equally, buyers must inform sellers of their long term plans and contractual arrangements for the use of gas, such as the growth-trend for combined cycle power generation.
An example of this is the presence of a gas user, Osaka Gas Co., in the new Bonaparte Gulf group, as well as a market promoter, Sumitomo Corp.
NORTHWEST SHELF UPDATE
Despite installation delays on the Goodwyn A production platform, now expected to go on stream by yearend, the Northwest Shelf LNG project will fulfill its obligations to Japanese buyers to reach plateau levels of 7 million tons/year of LNG by 1995. During 1993 the Northwest Shelf supplied 83 cargoes of LNG to Japan. For 1994 there will be 104 cargoes as the buildup continues.
The group believes there is potential for more spot sales in Europe before 1995, particularly if civil unrest in Algeria continues to trim Algerian supplies.
It also is likely that South Korea will be looking for extra cargoes during 1995-96 even though that country's buyers will have regular shipments from Indonesia, Malaysia, and Brunei. Further spot sale opportunities could arise in Taiwan in 1995.
However, on a more permanent basis, Woodside and its five partners are eager to add new contracts with a view to setting up at least one-possibly two-more LNG trains at the Burrup Peninsula plant. The significant growth in demand throughout Asia is seen as occurring in 1998 and beyond.
For Woodside and its fellow Northwest Shelf group participants, Japan is regarded as the primary market. Part of that is a loyalty consideration, but Japan also is the market the group knows best and the market likely to have the greatest expansion.
But to fulfill any major new contracts, the Woodside group must prove up more reserves, and that means further exploration outlays in the short to medium term. To that end, Northwest Shelf group market negotiators are continually talking to Japanese buyers, keeping them informed of plans and progress.
A number of discoveries have been made on Woodside group permits, such as Dixon and Echo fields, which need further appraisal. There also are prospects and leads still to be evaluated.
Longer term, perhaps after 2005, Woodside believes there will be development possibilities for its huge Scott Reef discovery made in the early 1970s. Water depth in the area is not a great difficulty, but the find is a long way from the coast, and the project may need to revolve around an innovative self-contained floating LNG plant anchored nearby.
SANTOS GROUP
There has been a transformation of interests in the Bonaparte Gulf Petrel and Tern fields off northern Australia that has put the gas project back on the map as a potential development for Northern Territory and Western Australia. Santos and Bonaparte Gas & Oil bought the interests of a number of smaller participants in the permits.
Bonaparte Gas & Oil, formed in October 1993, is a Japanese combine made up of Sumitomo, Osaka Gas, and Teikoku Oil Co. As a group it holds a 30% stake in Tern field and 44.51% in Petrel. Santos owns 70% of Tern and 50.49% of Petrel. The other interest holder in Petrel is another South Australian company, Sagasco, now owned by the Boral Group, with 5%.
This consolidation of ownership has resulted in a much more unified production and marketing group with experience in Australia and Asia. Like Woodside, it has set its sights on supplying a niche in the Northeast Asian LNG market early in the next century. However, the exact nature of the project must await the outcome of an appraisal drilling program due to start in April.
Currently, reserves are estimated at 3 tcf. A major review of geology was conducted following the most recent well, Petrel 4, drilled in 1988. Using this as a base, the group has planned a new three well program consisting of two Petrel wells and one well in Tern to confirm estimated gas reserves.
The drilling will be followed by a feasibility study of several development alternatives, with an LNG plant supplying about 2 million tons/year among the options. The others include a methanol plant and supply to the Australian gas market. The study may recommend a combination of options.
If an LNG project appears viable, there likely will be futher field appraisal in 1995-96, followed by final feasibility studies in 1997 with design and construction carried out during 1997-2002.
The contemplated $2-3 billion (Australian) LNG project is relatively small by world standards. However, it would be well located in terms of present infrastructure. Darwin's ports, roads, and airport lie 300 km east of Petrel/Tern fields, and land near the city has been earmarked for a plant site. Darwin also is closer to Northeast Asian markets than some rival projects, which will reduce LNG transportation costs.
WAPET
Wapet is assessing market opportunities, gas reserves, and engineering concepts for its Gorgon discoveries, 70 km west of Barrow Island. The company is a joint venture of Ampolex, Chevron Asiatic Ltd., and Shell Australia.
Gas strikes have been made with 1 Gorgon, 1 Central Gorgon, and 1 North Gorgon. There also are smaller satellite discoveries at Tryal Rocks and Spar that can't stand alone as development projects but could be tied into a Gorgon complex.
Like Santos Group, Wapet plans appraisal drilling to confirm its reserves estimate. The 2 North Gorgon is scheduled to spud in April with the Robert F. Bauer drillship. The well will cost about $20 million and represents a substantial commitment from Wapet. At present, the estimate of recoverable gas reserves is 4-15 tcf.
Market discussions have been conducted with potential LNG buyers in South Korea, Taiwan, and Japan the past 18 months along with technical studies of the fields. However, until more detailed feasibility studies are completed, the project is essentially on hold.
Wapet is aware of some disadvantages to overcome in a Gorgon project. The carbon dioxide content of the gas, for instance, is relatively high at about 15%. The gas has less condensate content than surrounding fields in the region, which means less spinoff cash flow. Water depth is greater than that of other fields. Distance from Barrow Island is 60 km, and the mainland is another 60 km away.
There are a number of possible - although highly speculative - scenarios, such as a plant on Barrow Island or a plant twinning the Woodside group's facilities on Burrup Peninsula.
If a Gorgon project of about 3 million tons/year becomes the window of opportunity is perceived as 2000-2005.
WESTERN MINING
Western Mining has made two interesting gas discoveries - East Spar and Maitland - off Western Australia within the last 18 months:
East Spar, confirmed by two appraisal wells, appears to hold a large reservoir of wet gas 35 km from Varanus Island, near Barrow Island. Results of a recent 3D seismic survey over the discovery should be known within the next few months, and this will be used to drill a fourth well later in the year or early in 1995.
At present, there appears to be enough gas to meet domestic demand being created by the new gold fields pipeline planned to run from the Pilbara iron ore region just onshore from the gas fields to the Kalgoorle/Kambalda gold and nickel mining provinces 450 km west of Perth. Thus, the potential for export of gas in the form of LNG probably lies in other finds - some yet to be made.
Western Mining has sparked interest in a possible LNG project because it has a number of other prospects in the East Spar region, which is fuming into a significant gas and oil province. Maitland is a good single well gas field in a new shallow depth reservoir in about 85 m of water.
Further exploration is needed, but continued success could become the basis of an export proposal in time to meet the Asian window of opportunity.
OTHER POSSIBILITIES
BHP is in a position similar to that of Western Mining. In the last 12 months it drilled gas and oil discoveries with three wells in what was known as the West Muiron field, which subsequently indicated a separate structure. BHP renamed the West Muiron 2, 3, and 4 wells Macedon field and the West Muiron discovery Pyrenees field.
Interests are held by operator BHP 71.43% and Ampolex 28.57%.
It is early in project planning, but BHP is investigating innovative LNG technologies and commercial arrangements that could be used to develop an LNG project based on Macedon, Pyrenees, and its other Carnarvon basin discoveries.
The growing potential of the Carnarvon basin as an oil and as province conjures up a number of joint development possibilities. For instance, there is speculation about the combined potential of gas reserves under BHP and Western Mining permits.
Perhaps even more feasible is the tying of either or both of these areas to a joint venture involving the Woodside group. It could provide early justification for construction of a fourth and fifth gas train on the Burrup Peninsula.
FOREIGN RIVALS
The most prospective grassroots LNG projects seen as rivals to Australian prospects for Northeast Asian markets are being planned in the Middle East.
For example, the Oman project operated by Shell is expected to target the Asia-Pacific region. There also are two developments in Qatar. One, a 4 million ton/year operation, will supply Chubu Electric in Japan. The other, operated by Mobil Corp., will target South Korea and Taiwan. Both also will make inroads into the European market.
Gas in the Middle East fields is proved, but shipping costs to Asia are much greater than from Australia, and this provides market opportunities for competitive Australian producers.
Closer to home, there is the Natuna project in Indonesia, although this too is likely to be relatively expensive gas because of its deepwater location and technical difficulties seen in producing its extremely high CO2 content gas.
Papua New Guinea's Pandora discovery operated by Mobil in the Gulf of Papua, believed to hold 2-3 tcf of reserves, also is a potential rival to Australian projects. Further appraisal will be required.
Also in Papua New Guinea, there are early proposals to harness the vast gas reserves established in onshore fields, such as Hides and Juha in the southern highlands region, to create an export project. This would involve pipelines to the coast and construction of an LNG plant either offshore or on the shores of the Gulf of Papua. However, these proposals are still in their infancy.
In the final analysis, the LNG projects most likely to go ahead-Australian or otherwise-are those that can reduce the conventional costs of development and still be left with an economically acceptable rate of return. This concept for future LNG markets presents the industry's producers with an intriguing, competitive challenge.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.