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Markets & Forecasts

Australian LNG – More supply still to come

The market is underestimating global LNG supplies from current facilities, including those in Australia, Akap Energy’s Anish Kapadia writes in this contributed feature The market is underestimating global LNG supplies from current facilities, including those in Australia, Akap Energy’s Anish Kapadia writes in this contributed feature.
By Anish Kapadia 20 February 2019 Asia Pacific / LNG 0 33948
Several Australian projects (such as Wheatstone, above) have demonstrated an ability to produce above their nameplate capacities. (Chevron)

Our analysis of Australian LNG supply suggests production in the early-to-mid 2020s will be much higher than market forecasts, despite expectations of falling production from declining fields. We think production could grow to around 95 mtpa by the mid-2020s because of a substantial upside to the nameplate capacity of existing facilities, in addition to tie-backs and new developments keeping existing facilities full and utilising new brownfield LNG trains. Australia’s key advantages over other locations for liquefaction projects are its low offshore upstream operating costs, cheap shipping costs to Asia, investor friendly environment and a huge installed base of LNG infrastructure and associated cashflows.

LNG production

Australia accounted for almost 20% of global LNG supplies in 2017, having exported approximately 56 mt (up 28% year on year) and having 71 mtpa of capacity by year-end. Another 17 mtpa of capacity was added in 2018, taking the figure to 88 mpta with the inclusion of the Prelude FLNG project. We estimate Australia’s LNG production grew by 12 mt year on year in 2018, to 68 mt. Australia should overtake Qatar as the world’s largest LNG producer, and in fact did so on a monthly basis for the first time in November. We estimate Australia’s annualised supply in Q4 2018 was close to 80 mt, which is almost double the level seen at the beginning of 2016.

Several Australian projects have demonstrated an ability to produce above their nameplate capacities, and we therefore estimate Australia’s effective nameplate capacity is actually 97 mtpa. Therefore, there is around 40 mtpa of potential upside to 2017 exports – equivalent of 14% of global supply that year. The state of Western Australia alone is the world’s third-largest LNG exporter.

In reality, with maintenance factored in and the lack of sufficient gas supplies in areas such as Queensland, we expect Australia’s actual production in 2020 to be around 84 mtpa. This would represent a utilisation rate of 95% – still meaningfully higher than the global average over the past five years of approximately 75%. November 2018’s annualised exports of 79 mtpa were only 5 mtpa shy of this figure, and that was before the Ichthys plant ramped up and Prelude came online. These two projects have a combined capacity of 12.5 mtpa.

The chart below shows the maximum rate at which Australia’s LNG plants have run versus their nameplate capacities for a quarter. All the plants have shown the capability to run above their nameplate capacities. Wheatstone has shown it can run at 15% above capacity, although it has not yet done so for an entire quarter, while the two Queensland plants have not had sufficient gas supplies to run above their nameplate capacities.

Maximum quarterly utilisation rate and upside potential

LNG growth potential

Many may be writing off Australia’s prospects for further LNG growth in the 2020s, with forecasts suggesting a fall in production given rising domestic gas demand, questions over resources in Queensland and the decline of legacy fields such as the North West Shelf and Bayu-Undan. The main impediment for the development of further projects is the memory of cost blow-outs on recent projects, meaning future projects are expected to be unprofitable. However, there is no shortage of gas in Australia – we estimate the country has at least 1.7 trillion cubic metres of discovered undeveloped offshore resources that could go towards future LNG projects.

Brand-new greenfield onshore or large-scale FLNG projects do not appear viable, but there are lower-cost opportunities for debottlenecking at existing plants – for example, most plants have shown the ability to run at 10% above nameplate capacity – and cost-effective expansions at existing plants, such as Darwin and Pluto, are being studied. The most likely candidates for expansions are Pluto, Darwin and Ichthys, with Gorgon and Wheatstone also having the potential for additional trains further down the line. Expansion costs should be much more reasonable and more globally competitive than the costs for greenfield projects. For example: Woodside estimates a $700 per ton expansion cost at Pluto compared with an initial cost of more than $2,000/t for the first train. With the sanctioning of Pluto Train 2 and – potentially – Darwin Train 2, Australia’s LNG export capacity should easily exceed 100 mtpa by 2025.

Supply outlook assuming no new LNG facilities

The legacy LNG plants in Australia are North West Shelf (which came online in 1989), Darwin (which came online 2006) and Pluto (which came online in 2012). Production from these plants has been forecast to decline in the 2020s, but there are several fields previously being considered for standalone developments that are now likely to extend the plateau of these projects into the 2030s. The 425 billion cubic metre Browse field is being considered for the NWS, while the Pyxis discovery and Woodside’s recently purchased 255 bcm Scarborough field are backfill and expansion options for Pluto. The Equus field is also likely to supply Pluto and the NWS. ConocoPhillips is expecting to use the 113 bcm Caldita-Barossa field as backfill for Darwin. There are a number of projects vying to supply a second train either at Darwin or Ichthys in the future, including the 76.5 bcm Bonaparte cluster (which covers the Petrel, Tern and Frigate fields), the 56.6 bcm Cash Maple field, the 56.6 bcm Crown & Lasseter project, the 85.0 bcm Evans Shoal and the 85.0 bcm Greater Poseidon field. Given the number of projects, it seems likely a second train at Darwin and/or Pluto will go ahead. Darwin has authorisation to produce up to 10 mtpa, while its first train has a capacity of only 3.5 mtpa. This means the second train could have a capacity of up to 6.5 mtpa.

Gorgon and Wheatstone have had some teething problems since being brought online, which is not unusual for LNG facilities. However, these problems seem to have now been ironed out, so we think the focus will shift to debottlenecking and producing at higher than nameplate capacities. Performance appears to have been strong at the fields serving the plants, so the limiting factor will likely be the downstream facilities. Ichthys and Prelude have yet to reach their capacities, so we will have to wait and see if there is debottlenecking potential in these facilities too.

The table below shows the 1.7 tcm of resources that are under consideration for development either as backfill for existing facilities or alongside new planned trains at existing facilities.

Australian LNG growth options

  LNG plant Size, bcm
Backfill
Barossa Darwin 113.3
Equus NWS 56.6
Clio-Acme NWS 99.1
Browse NWS 424.8
Crux Prelude 56.6
Pyxis Pluto 28.3
Transborders New FLNG 56.6
Arrow CBM QCLNG 141.6
New trains
Scarborough Pluto 254.9
Petrel, Tern and Frigate Darwin 70.8
Cash Maple Darwin 56.6
Crown Lasseter Darwin 56.6
Evans Shoal Darwin 85
Greater Poseidon Darwin 85
Chandon, Geryon, Orthrus and Maenad Gorgon 113.3
Source: Company data, Akap Energy estimates

Conclusions

  • Significant growth: We expect Australian LNG production to grow by almost 50% by 2020 compared with 2017, rising by 27 mt to reach 84 mt, with a further 9 mt being added by 2025 from new brownfield projects.  There is approximately 9 mtpa of upside to the nameplate capacities of Australian plants that has already been proven without further debottlenecking as all Australian plants have shown they can run above nameplate capacity. This extra capacity is the equivalent of two LNG trains
  • Backfill projects and new brownfield trains will be sanctioned: We are confident that backfill and brownfield expansion projects will go ahead as the economics are favourable. This means production from existing facilities will stay flat or even grow. We think at least two new trains will be sanctioned, likely at Pluto and Darwin). There is no shortage of gas, with more than 4.25 tcm of contingent gas resources.
  • CBM-to-LNG production will grow: Investment in upstream CBM developments in Queensland is picking up as drilling costs have fallen substantially, improving the economics of filling the ullage in the facilities that ran at only 80% of nameplate capacity in 2017. Utilisation rose to 93% in November 2018.
  • Economics are favourable: Upstream development costs for future offshore projects are less than $1/MMBtu (e.g., at Scarborough) and still less than $1.5/MMBtu at liquids-rich projects (such as Browse). In addition, pipeline costs can likely be shared between multiple developments, new LNG trains at existing sites are cost competitive globally (with costs of approximately $750/t), upstream opex is also relatively low (being less than $0.7/MMBtu at Pluto and the NWS), there are very low shipping costs to Asia (a $1.50/MMBtu advantage over cargoes from the US Gulf) and accelerated depreciation will allow spending to be offset against current taxation.
  • Huge current Free Cash Flow: Given the cash flow generation from the base projects, companies are willing to take an FID with low volumes contracted for shorter time periods – e.g., Woodside is willing to move forward with Scarborough once it is 50% contracted under long-term contracts of only 10 years.

Anish Kapadia is the founder and Managing Director of AKap Energy. Anish can be contacted at anish@akapenergy.com

AKap Energy combines deep-dive, fundamental understanding and valuation of assets with a bottoms-up approach to forecasting oil and gas supply with a clear financial and commercial understanding.  www.akapenergy.com