When we started work on Australian Coal Seam Gas 2011: From Well to Wharf, we had ten questions in mind. Here are the questions and our conclusions. You can read more about the report at:
1. What is the outlook for the Australian CSG to LNG projects?
With three of the four major projects having reached final investment decision, there is clearly a massive amount of CSG LNG development underway, similar to the capacity under construction in Western Australia. There is likely to be a second train for APLNG and there may ultimately be further trains to follow, with a third train for QCLNG and the Arrow LNG project. We expect that there will be at least 25 Mtpa of capacity at Gladstone by 2020.
2. What is the outlook for Australian LNG demand and pricing following developments in Japan and the Middle East?
After signing a record number of offtake agreements over recent years, demand for Australian LNG is expected to soften. However, there has already been sufficient demand to sanction five CSG LNG trains, with potential demand for another four trains in due course (two for Arrow and one each for QCLNG and APLNG). Competition for market share is intense with several other conventional Australian projects nearing FID and established regional and Qatari projects looking to expand. The market and LNG construction capacity will not support all of these projects and hence it is inevitable that some Australian LNG projects yet to take FID will be delayed or deferred. Pricing continues to be oil-linked at levels broadly consistent with historical experience.
3. What is the current status of CSG upstream development? Is it on track?
It generally took longer than expected to get Federal environment approvals and Queensland flooding caused delays (to which QGC is responding by increasing the number of drilling rigs). The projects that have taken FID are at an early stage and there are no obvious signs of them being unable to achieve their targets for first LNG. However, as with most major Australian development projects, it is unlikely that the projects will be finished on time and projects that took FID early are at less risk of delay than later projects.
4. Are there sufficient reserves?
Reserves and field productivity are the ultimate constraints on expansion and we believe there are challenges ahead as the companies start to move outside the best acreage.
5. What is the position of the smaller CSG companies in strategy and reserves? Will they be able to sell their gas for LNG?
One of the smaller companies with an LNG proposal, Eastern Star, is subject to a takeover bid and this is the most likely outcome for smaller companies with a material level of reserves.
6. Will the labour resources be available for project development?
Labour shortages are only beginning to emerge but are expected to intensify in 2012. The LNG operators, head contractors and governments have been expecting this and have plans in place to secure the necessary resources. Second and third-tier contracting companies are expected to experience resourcing difficulties, as are smaller oil and gas companies. Rising costs are one likely outcome of a stretched labour market. Another possible consequence is problems due to poor quality work and potential subsequent delays to start up.
7. What is the outlook for LNG project costs and timing and what strategies are being used to manage costs and schedules?
The main strategies being used to manage costs and schedules are fixed price contracts, labour agreements and contractual damages for delay and incentives for early delivery. However Australia has a poor record in delivering major resource projects on time and budget and LNG projects invariably run late and go over budget.
8. Are environmental and community issues likely to delay projects?
There are likely to be delays to individual project components due to environmental and community issues. With around 1500 regulatory requirements per project, there will undoubtedly be inadvertent breaches, which will lead to delays and bad publicity. Whether this causes delays to an entire project depends whether or not any delays are on the critical path. At the same time the Queensland Government has a strong commitment to development of the projects.
9. What is the outlook for the domestic gas supply and demand balance and availability of gas contracts for domestic buyers?
East coast gas demand and supply is certain to be dominated by LNG. With most major gas suppliers on the east coast focussed on meeting their LNG contracts, new long-term domestic gas contracts or contract extensions are likely to be difficult for gas buyers to obtain, at least for this decade. There are currently only three domestic gas projects under development on the east coast (Gloucester, Turrum and Kipper) and few signs yet of smaller companies and/or new areas being able to fill the gap. Short-term supplies are likely to be available from time to time, either in the form of ramp-up gas or when LNG plants go down for maintenance. We see the historical dominance of long-term inflation-linked contracts waning and short-term contracting and pricing increasing.
10. What is the outlook for east coast gas prices and the east coast gas market?
Prices for any new long-term contracts or contract extensions are likely to reflect LNG netbacks of around $7.00/GJ, resulting from: limited conventional reserves, high development costs offshore Victoria, high costs of CSG development outside the ‘sweet spots’ dedicated to LNG and carbon prices. Any long-term contracts may increasingly be linked to oil, either directly or indirectly through linkage to LNG pricing. Short-term prices will be governed by short-term demand and supply. A two-part market is likely to emerge on the east coast, with any long-term baseload contracts reflecting LNG netback prices and a volatile short-term market, balancing volatile supply from LNG projects and volatile demands for power generation. There may be an increasing trend for large industrial customers to buy into upstream gas production to manage their risks.