The Global Energy Demand for Australian Sourced LNG

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1 23 June 2010 The Global Energy Demand for Australian Sourced LNG Gavin Briggs Manager Northern Australia Research Programme Summary Energy is a commodity that continues to have both strategic and economic significance for Australia. Energy, and in particular, gas, will continue to be a central element in Australia s future prosperity. The nation s gas resources are sizeable, third only to coal and uranium. Nearly all of Australia s conventional gas resources, however, are located in North West Australia. This demands greater focus from federal policymakers on how to continue to capitalise and secure that region s economic benefits. Analysis Australian sourced energy benefits from, among a range of factors, its geography, reliability and security of supply. Approximately over 90 per cent of Australia s known conventional gas resources are centred along North West Australia in three main basins: Carnarvon, Browse and Bonaparte. There are other gas reserves located around the nation, including parts of South West, South East and Central Australia. These additional gas resources include reserves of tight gas accumulations in Western Australia and South Australia, as well as potential shale gas deposits in the Northern Territory. Presently, Australia exports over three-quarters of the energy it produces. In , energy exports accounted for 33 per cent of Australia s total exports of goods and services. In the last five years to , the value of Australia s energy exports increased by 232 per cent. The ongoing rise in the value of Australia s energy exports has continued to increase over the past twenty years at an annual rate of ten per cent. Australia s abundant and varied mix of energy resources has already demonstrated the importance energy will play in the nation s future economic performance and growth prospects. Liquefied Natural Gas (LNG) is a key component of Australia s future energy security as well as a major export commodity for the global energy market. LNG is a clean fuel source and based on current known reserves, can provide a secure energy supply for the next half-century.

2 In a world where oil supplies are dwindling, LNG is described by some research and energy analysts as a very long-term game. Investment decisions to develop onshore and offshore gas fields are based, in part, on assumptions of what the price of oil will be over an extended period of time. When one energy resource, such as oil, reaches peak production, it can have an impact on the degree to which another energy type is developed. While investment decisions are influenced by a range factors, from cost pressures, technology, skilled labour force, Native Title considerations, security and continuity of supply, the presence of ready-made energy markets makes the development of LNG fields appealing because of its inherent sustained economic benefits. The Australian Government claims gas is projected to be the fastest growing fossil fuel over the period to 2030 and in the next ten years, the domestic LNG industry has the potential to attract up to $60 billion in new project investment. LNG is a premier energy resource that Australia has significant reserves, located across several onshore and offshore sites across Northern Australia. There are several LNG sites in production. Other mega-projects are either planned or under construction with many of them in North West Australia. One such project is the Chevron-operated Gorgon Project, located on Western Australia s North West Shelf. This is a $43 billion joint venture, between the Australian subsidiaries of Chevron (approximately 47 percent), ExxonMobil (25 percent), Shell (25 percent), Osaka Gas (1.25 percent), Tokyo Gas (1 percent) and Chubu Electric Power (0.417 percent). Other significant energy resource projects across Western Australia include those shown in Table 1. Oil, Gas and Condensate Projects in Western Australia, as at June 2010 (Table 1) Oil, Gas & Condensate Project Value (Estimated A$m) Employment (Construction) Employment (Permanent) Apache - Devil Creek Project, Pilbara Apache Van Gogh Oil BHP Macedon Carnarvon Offshore Basin BHP Billiton Pyrenees Oil Project, Carnarvon Offshore Basin Browse LNG Precinct Kimberley Chevron Wheatstone LNG Gorgon Joint Venture Gas Processing Project North Rankin Redevelopment Woodside Pluto LNG Plant Woodside Energy Cossack Wanaea Lambert Hermes Redevelopment Project (Carnarvon Offshore Basin) Total Source: Western Australian Government Department of Mines and Petroleum and Department of State Development, June 2010

3 The Global Demand for Energy Global demand for energy is forecast to rise over the long term, especially from non-oecd nations in Asia, such as China and India. The International Energy Agency (IEA) projects global demand for gas resources to annually increase by 1.5 per cent to reach 149,092 Petajoules (PJ) in This will correspond to an increase in the global LNG trade. The IEA estimates that this will annually increase by 3.7 per cent to 17,104 PJ in Australia is increasingly an important supplier of energy to the global market. This includes LNG. The Australian Government s Energy in Australia 2010 stated that in , the value of Australian Liquefied Natural Gas exports was $10.1 billion, which is an increase of 72 per cent from Australia s major LNG trading partners include Japan, China and South Korea. Market expansion is likely to expand as Australia s LNG capacity increases. New export opportunities for Australia may come from countries such as India, Thailand, Singapore and Taiwan. The Minister for Resources and Energy, Martin Ferguson, has described Australia as just one of only three net energy-exporting OECD countries, the others being Canada and Norway so we are part of a very small club and our role and our assets in global energy supply should not be under-stated. Australia s energy production to , however, is projected to exceed energy consumption. (Table 2) This means that the quantity of energy available for export will remain above projected domestic consumption requirements. Following coal and petroleum products, natural gas is currently Australia s third largest supply of energy for domestic consumption. Australia s Net Trade in Energy, (Table 2) Average annual growth to Petajoules (PJ) % Black Coal 12, Oil (a) LPG LNG Uranium 11, (a) Includes crude oil, other refinery feedstock and petroleum products. Source: Australian Bureau of Agricultural and Resource Economics (ABARE) 2010, Australian energy projections to , ABARE Research Report 10.02, for the Department of Resources, Energy & Tourism Australian energy exports are projected to rise over the long-term to Greenfield projects, offshore petroleum exploration and the expansion of existing energy projects will contribute to the supply of energy exports to the global market, especially in Asia. This is likely to place Australia firmly as an energy superpower. In March 2010, the Department of Resources, Energy and Tourism positioned Australia as the world s largest supplier of coal, the second biggest supplier of uranium and fifth biggest supplier of liquefied natural gas.

4 Offshore Energy and North West Australia On 14 April 2010, the Federal Minister for Energy and Resources released seismic data and seafloor mapping titled the South West Margin Survey. The data and mapping conducted by Geoscience Australia is highly significant because it informs companies of offshore exploration opportunities, especially in frontier areas off Western Australia s west coast. The Minister said the South West Margin Survey data will inform the acreage release process in 2010 and future years, resulting in new exploration opportunities well beyond existing horizons. The Australian Energy Resource Assessment supports this view, stating many of Australia s known and, potentially, undiscovered oil and gas resources lie offshore within Australia s large marine jurisdiction. This offshore region of North West Australia contains energy resources which markets may seek well into the future. Presently, 92 per cent of conventional gas resources produced by Australia are from the offshore industry in the Carnarvon, Browse and Bonaparte basins along North West Australia. Offshore North West Australia Gas Province: Offshore & Marginal Basins (Figure 1) Source: Geoscience Australia One aspect of the report focuses on Australia s gas reserves and production. It noted that over the last twenty years, Australia s identified conventional gas resources have increased threefold and approximately 90 per cent of estimated recoverable reserves of conventional gas are situated on the West and North-West coasts of Australia. These regions will continue to grow in economic importance and geo-strategic significance, especially as the global appetite for energy continues. It is, however, Western Australia, which is the nation s largest producer of gas, accounting for 64 per cent of national production in In 2009, State Government sources listed Western Australia as maintaining its number one position as the nation s foremost exporter. That translated into 39 per cent of all Australian merchandise exports, an amount of $196 billion. In second place was Queensland followed

5 with 22 per cent. The eastern seaboard states of New South Wales and Victoria accounted for seventeen per cent and nine per cent respectively. Western Australian Premier Colin Barnett told an audience at Rice University in Houston, Texas on 13 April 2010, said that if Australia is known for its mining industry, then that is because of Western Australia. The Premier said that his State accounted for 62 per cent of Australia s mineral production (excluding coal), 73 per cent of natural gas and 64 per cent of crude oil and condensate. When Chevron signed a $90 billion deal to supply gas from its Wheatstone project to the Tokyo Electric Power Company in December 2009, the Western Australian Premier announced that it was the largest export contract Australia had ever seen. Given this project and Gorgon...I think there is not much doubt that by 2020 we [Western Australia] will be second only to Qatar in LNG production globally, said Premier Barnett. Chevron followed up that agreement a month later in January 2010 with a deal over 15 years to supply Kyushu Electric Power Company 0.3 million tonnes per annum from its Gorgon project. LNG developments are occurring across Northern Australia. These projects will feed the global demand for energy. One such project is the $23 billion INPEX onshore gas facility in Darwin which will serve the gas and condensate field at Ichthys in the Browse Basin. That energy project will employ 2000 people during the construction phase, and once operational, will permanently employ 300 workers. Also, the Queensland Department of Employment, Economic Development and Innovation (DEEDI) claim that the LNG industry in that State could involve an investment of over $40 billion and the export of 50 million tonnes per annum. DEEDI projects the LNG industry will also deliver 18,000 jobs for Queensland and provide $850 million per annum in royalties to the State Government. That State s first export of LNG is slated to commence in 2012 and the majority of those exports, such as projects at Gladstone and Abbot Point (near Bowen), will flow from The Australian Petroleum Production and Exploration Association (APPEA) claimed in April 2010 that Australia could even occupy the top position by the end of this decade. According to data from Credit Suisse, APPEA believe that Australia could be the number one global exporter of LNG, based on major new annual natural gas output planned over the next decade. (Table 3) Major New Annual Natural Gas Output Planned to 2020 (Table 3) Country Millions of tons Australia 60.9 Qatar 46.8 Indonesia 19.7 Nigeria 10.0 Russia 9.8 Source: Credit Suisse Industry supports the view that Australia will become an increasingly dominant supplier of LNG, however, though not necessarily the number one global exporter of LNG. In an interview with The Economist, Jon Chadwick, an executive vice-president at Royal Dutch Shell, whose company is involved in the Gorgon joint venture project, predicted that by 2020 Australia could become the world's second-biggest exporter of LNG, second only to Qatar.

6 The value of mining and petroleum production to the Western Australian economy is worth upwards of approximately $70 billion. The Western Australian Premier has also noted that the level of commercial interest in the state s mining and energy sector is large, with over 500 commercial mining and petroleum projects producing over 50 different products. Interestingly, Western Australia produces one-third of the nation s exports, with just one-tenth of its population. Western Australian Mineral and Petroleum Sales, 2009 (Table 4) Commodity A$ Billion Iron Ore $28.1 Crude Oil and Condensate $8.7 LNG $6.3 Gold $5.7 Alumina $3.6 Nickel $3.3 Others $5.3 Total $61.0 Source: Western Australian Department of Mines and Petroleum, 2010 Western Australia will undoubtedly play a major role in contributing to the nation s energy security and economic opportunities, almost in spite of rising costs for oil and gas projects, skilled labour shortages and proposed federal resource taxes. While the Western Australian Premier acknowledged in April 2010 that his State s petroleum sector is still in the comparatively early stages of development, he noted there are around 30 international and gas companies and more than 40 oil and gas service companies in Perth. Such interest and investment in Western Australia s energy resources from overseas companies looks set to continue. Western Australia reportedly has approximately $170 billion worth of investments lined up over the next five years. The future looks very bright indeed on Australian s Indian Ocean seaboard. Australia s net energy resources, both in value and volume, will continue to significantly contribute to the nation s long-term economic prosperity. Western Australia and the offshore energy industry will ensure that this becomes reality. As exploration and production of oil and gas continues, especially the development of LNG projects, have Australia well positioned to capitalise on their relative proximity to Asian markets and their growing demand for energy, especially for cleaner sources of energy, such as LNG. 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 Desborough House, Suite 2, 1161 Hay Street, West Perth WA 6005 Australia Tel: Fax: gbriggs@futuredirections.org.au Web: