Australia to Lead LNG Future

Australia to Lead LNG Future

By Michael J. Economides and Xiuli Wang

According to a forecast published this week by GBI Research, a UK energy consultant group, Australia will overtake Qatar by 2017 as LNG export leader.

With the speculative possibility of an emerging massive US LNG export market, fueled by the surfeit of shale gas production, LNG developments in Australia are likely to be the most promising activities in the world in this type of commodity. Two important facts work in its favor: 1) Chinese natural gas demand expected to be as much as quadruple of current natural gas usage by 2020 exceeding 12 trillion cubic feet (Tcf); and 2) the very large recent offshore discoveries of gas in Western Australia.

Australia is loaded with gas.

The country’s total natural gas reserves (excluding shale gas) are estimated at 110 Tcf by US EIA, making Australia the number 12th nation in the world.  Australian gas reservoirs are spread throughout the country but the Carnarvon basin in Western Australia is the largest. It accounts for almost 64% of the country’s total gas reserves because of the addition of the Gorgon fields. The Bonaparte basin in Western Australia is developed exclusively for the purpose of exporting LNG. The rest of the Australian gas is in the east. Mostly it is coal seam gas and is produced from the Surat, Bowen and Sydney basins.

The total gas production was estimated at a little over 1 Tcf in 2011. The production from Victoria basin has risen significantly from 2004 onwards. Production of gas from coal seams has risen exponentially from 2004 and now they constitute almost 30% of the total production and 50 % of Eastern Australian basins.

Barring any game changing technology or philosophy (such as a sudden GTL – mind conversion), LNG would be the only way to monetize Australian gas.

Qatar is currently the world’s largest LNG exporter with a liquefaction capacity of 77.5 million tons (4.23 Tcf) in 2011. The investment in new LNG facilities in Qatar has drawn to a standstill and is unlikely to change anytime soon. Australia, starting from a liquefaction capacity of 20 million tons (1.1 Tcf) in 2011, is expected to reach 124 million tons (6.8 Tcf) by 2017. (Note: the entire Qatar LNG output plus the highly ambitious Australian incremental gas production will still be below the expected incremental demand of China and Japan combined. Shale gas in China could play a substantial role but even the most liberal forecasts put any significant contribution until after 2020.)

Because of deep water, land based LNG liquefaction facilities may have difficulty to prove economically attractive because of the extremely high piping and gathering system costs across the water.  Floating Liquified Natural Gas (FLNG) terminals are expected to be the key to future LNG developments, especially for offshore natural gas.

Australia will be the launching ground of FLNG. After many years in R&D, Shell announced its intention to construct a FLNG project at Australia’s Prelude field in May 2011. According to the company announcement, production is expected to start by 2017, with a capacity of 3.6 million tons per annum. The BGI report suggests that in the future, offshore gas will contribute 10% of LNG through FLNG which is around 40% less expensive than that from centralized onshore LNG liquefaction facilities.

LNG will be the enabling mechanism to make natural gas fungible throughout the world and in the process to unify natural gas prices, currently ranging from $1/MMBtu in Russia to less than $4 in the US, $8.5 to $10 in Europe, and more than $16 in Asia.

According to the GBI report, the total LNG trade has increased dramatically since 2006. In 2011, it stood at about 233 million tons from 25 countries significantly up from only 158 million tons in 2006 produced by 16 countries. Japan, Korea, Spain, UK and China are the top five LNG importing countries, contributing to around 163 million tons of LNG imports. Investments in LNG projects are expected to increase and surpass $200 billion over the 2012–2017 period.

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