PERTH (miningweekly.com) - With the rise of China and India in the East, the global demand for energy is set to increase significantly, with the International Energy Agency (IEA) estimating that a capital investment of some $620-billion a year would be required in the oil and gas sector to meet the demand growth over the next 20 years.

Natural gas had been identified as a viable source to quench the driving demand, with China indicating that it would more than double its consumption of natural gas over the next five years.

In fact, the IEA reports that a quarter of the world’s new gas demand will come from China, with another quarter coming from the Middle East and other Asian countries and a fifth of the demand coming from North America.

The demand for liquefied natural gas (LNG) doubled from 200-million tons a year in the first decade of this century, it is expected to double again to 400-million tons by 2020 and it could potentially reach some 500-million tons by 2025.

While in 2010 Australia accounted for only around 2% of the world’s gas reserves and 2.1% of the world’s production, the country is currently the third-largest exporter of LNG in the Asia Pacific region and the fourth-largest exporter in the world, exporting more than A$12-billion in LNG a year.

Export volume is expected to triple to some 63-million tons a year by 2016/17, with the country’s Bureau of Resources and Energy Economics (BREE) saying that the country is on track to become the second-largest exporter of LNG by 2015.

Australia currently has more than half of the world’s major LNG projects under construction and their completion could see the country become the world’s largest LNG exporter, rivalling Qatar, federal Resources and Energy Minister Martin Ferguson has said.

There are six LNG projects under construction in Australia, worth an estimated A$166-billion, with LNG and oil and gas projects accounting for a combined A$195-billion in capital expenditure (capex).

“To put Australia's investment in oil and gas in perspective, the total committed expenditure on these projects is comparable to the cost of the Apollo Moon Programme in today's prices,” Ferguson said.

“But this is nowhere near the end of the story - several other projects are in different stages of planning, including the Equus, Arrow and Browse projects,” the Minister added.

“There are also a number of potential expansions to brownfield projects now under construction such as Gorgon, Wheatstone and Ichthys. In fact, under the right policy settings and demand, BREE has forecast Australia’s export LNG capacity could reach as high as 130-million tons by 2035.”

Cost Pressures

While A$100-billion potential investment was on the cards for the Australian oil and gas industry, cost pressures were threatening this new wave of investment, with two of the six projects recently announcing project costs increases since the start of 2012.

Australian oil and gas major Santos has increased its capital spend on the two-train, 7.8-million-ton-a-year Gladstone LNG project by $2.5-billion, putting the cost of the project at $18.5-billion by the end of 2015.

The miner has insisted, however, that the extra $2.5-billion to the Gladstone price tag was not a cost overrun, but rather the result of bringing forward capex to fund the upstream field development.

US energy major Chevron has also hiked the price of its Gorgon LNG project to A$52-billion, up from a previous cost estimate of A$43-billion.

Chevron blames the increase in foundation costs for Gorgon on higher labour costs and productivity issues associated with the Barrow Island location of the project, as well as logistical challenges and weather delays.

The Australian Petroleum Production and Exploration Association (Appea) has flagged the rising costs of Australian oil and gas projects as a deterrent to future investment, warning that it could, in turn, hinder Australia getting its hands on some A$19-billion in corporate taxes.

Policy Makers Alerted

Appea CEO David Byers warned that the high cost of business in Australia, at a time of increased international competition, was making it more difficult for Australian resources project to win market share and attract investment.

He called on policy makers to support, rather than hinder structural change.

Byers’ plea has been echoed across the industry, with energy major Shell’s Australian country chair Ann Pickard warning that the country had to re-evaluate its policy environment if it wished to retain its competitive edge.

Shell holds an interest in a number of LNG projects, including the Gorgon and Wheatstone projects being developed by Chevron, as well as the Browse and Sunrise projects being developed by Australian company Woodside.

The company was also developing the first floating LNG facility in the region at its Prelude project, which was expected to deliver some 110 000 barrels of oil equivalent per day, underpinning a 5.3-million-ton-a-year liquids operation consisting of 3.6-million tons of LNG, 1.3-million tons of condensate and 0.4-million tons of liquefied petroleum gas.

“Australian mineral, oil and gas resources have enabled the country to avoid some of the economic volatility that we see elsewhere in the world, during the worst financial crisis in 70 years,” Pickard said.

“But we can’t take our position for granted. We have to address our productivity issues and we need to address regulatory uncertainty so we can compete with other nations that are eyeing-off the same markets we are.”

Pickard reported that Australia’s LNG production costs were currently the highest globally, with the exporting markets of the US and Canada delivering product 20% cheaper into Tokyo Bay.

“And who knows what’s going to happen with East Africa starts to develop!” she added.

While Pickard believed that Australia was capable of rivalling Qatar as the largest LNG producer globally, she warned that the country had to find an effective solution to the hurdles it faced.

“From our perspective, we must innovate. Innovation is the key to keeping Australia competitive.”

Shell's Current Solution to Cost Pressures

Shell’s answer to the cost pressures faced by the Australian LNG market was the introduction of floating LNG technology, which Minister Ferguson has classified as revolutionary, with the potential to change the way LNG projects around the world are undertaken.

Shell’s Prelude floating LNG facility will be the largest floating offshore facility ever built. It is 488 m long and 74 m wide and, when fully ballasted, will weigh 600 000 t. Some 5 000 people were taking part in the construction of the facility, said Pickard.

“Without Prelude, there is no prospect for deep gas fields to be developed, especially in the short to medium term, and maybe not ever at the cost that we are seeing across Australian projects,” she added.

Pickard noted that the benefits of the floating LNG technology could also be extended to other LNG projects, in other regions of the world, adding that Shell had designed the technology with multiple applications in mind.

“From the start, the floating LNG programme has been about standardising where possible and customising where necessary to individual gas fields. This will make it possible to process a range of different field gas compositions without the need to redesign significant parts of the topside,” Pickard said.

Shell has also been conducting a continuous improvement process since work started on floating LNG technology, as the energy major continued to look for ways to reduce risk, improve costs and make final investment decisions faster.

“Subsequent projects in floating will benefit from 1.6-million engineering man hours that we’ve spent upfront in floating. Our experience in construction, commissioning and operating Prelude will bode well for the next floaters.”