Deal Highlights Challenges and Opportunities for Australian LNG

3 August 2011 FDI Team

Background

In late July, troubled Japanese utility, Tokyo Electric Power Company (TEPCO) concluded a heads of agreement deal with American oil and gas super-major Chevron. In one of Australia’s largest resource contracts, TEPCO has agreed to purchase Liquefied Natural Gas (LNG) worth $70 billion from Chevron’s proposed Wheatstone project in the Pilbara, over the next two decades. 

Comment

More than 80% of Wheatstone’s projected gas production has now been allocated, with Japan’s Kyushu Electric and South Korea’s Kogas previously accepting long-term agreements. The contracts will guarantee stability of demand, making it highly likely that Chevron and junior partners Apache Corporation, Kuwait Foreign Petroleum Exploration Company and Shell, will formally approve the final investment decision (FID) for the $30 billion project.

Roy Krzywosinkski, Chevron Australia’s Managing Director, in a statement announcing the agreement, said the gas giant had completed the front-end engineering and would make a FID later this year. Mr Krzywosinkski added the Wheatstone project and recently agreed on-shore facilities at Ashburton North,would “unlock the significant gas reserves in the Western Carnarvon Basin”. Negotiations are continuing over the possibility of TEPCO acquiring an equity share in the Wheatstone gas fields and the Ashburton North site.

According to Chevron, were the Wheatstone project to go ahead, the operation, at its peak, would create employment opportunities for 6500 people and provide $21 billion in government revenue. Saul Eslake, Director of the Productivity Growth Program at the Gratten Institute, argued that current LNG projects provide considerable opportunities for Australia to become a global powerhouse. Mr Eslake argued that Australia should view current expansions in the resources sector as an opportunity to develop skills and expertise “to serve our country well after the peak construction period of these projects is long past”.  Australia has the potential to become a global leader in servicing equipment, manufacturing, construction and geological services, ensuring continuing prosperity beyond the ‘boom’ stage of the hydrocarbon sector. Strategies must be developed to ensure the diversity of the economy, to avoid Australia succumbing to Dutch disease, a stagnation associated with over-reliance on the resources sector.  

The rapid development of the hydrocarbon sector, presents not only opportunities but also challenges, according to industry experts. Mr Eslake argues that governments must develop better planning and development policy in public infrastructure, productivity, migration and the Foreign Investment Review Board processes, to ensure the continued expansion of the sector. The speed with which the sector and demand have expanded has surpassed all projections, and current deficits must be resolved.

The demand for Australian LNG is based on the stability of the state and regulatory regimes. The Federal government must address confusion associated with proposed changes to the tax regime arising from the Minerals Resource Rent Tax and the price on carbon. 

Industry must also manage expectations to avoid loss of confidence within the sector. Cost blowouts, such as the $1 billion cost hike and trimmed overall production rate at Woodside Petroleum’s flagship Pluto LNG project, must be managed to ensure continued investment and demand within the Australian LNG market.

If current opportunities and challenges within the hydrocarbon sector can be reconciled, Wheatstone and the $300 billion invested in other similar projects, will bolster the Australian LNG market and allow it to overtake Qatar as a market leader by 2020.

Liam McHugh

Strategic Analyst

Northern Australia/ Energy Security

[email protected]

Any opinions or views expressed in this paper are those of the individual author, unless stated to be those of Future Directions International.

Published by Future Directions International Pty Ltd.
Suite 5, 202 Hampden Road, Nedlands WA 6009, Australia.