Technical snags and changing markets hamper Australia’s $200 billion LNG boom

SYDNEY (Bloomberg) --Cooks on strike and cracked equipment are among the latest maladies to undermine Australia’s $200 billion push to become the world’s biggest liquefied natural gas exporter.

More than a year after the completion of a decade-long LNG construction boom, two of the seven marquee projects haven’t been able to work right, the nation’s east coast urban centers face an impending gas shortage blamed partly on exports, and the government is receiving relatively meager tax revenues from fuel sales.

LNG Boom

The setbacks are heating up a public debate between the pro-fossil fuel government and environmentalists over the role gas should play in the country’s virus recovery and energy future. Meanwhile the pandemic has cast doubt on long-term projections for the fuel and is causing billions in writedowns on the country’s once-vaunted gas assets.

“The economics of gas have really turned upside down in short order to make some of those massive investments from 10 years ago already look like pretty poor decisions,” said Ebony Bennett, deputy director at the Australia Institute, a policy think-tank.

While Australia has been exporting LNG since the 1980s, the recent boom began in 2009 with Chevron Corp.’s final investment decision in Gorgon, and ended in 2019 when Royal Dutch Shell Plc shipped out the first cargo from Prelude -- the world’s biggest floating LNG plant.

Surpassing Qatar

In total, companies spent more than $200 billion building seven new plants, boosting Australia’s export capacity to about 88 million tons a year, surpassing Qatar to become the biggest in the world.

Those book-end projects are at the heart of current problems. Prelude, floating 475 kilometers (295 miles) off the coast of northwest Australia, hasn’t shipped a cargo since January due to technical glitches. Adding to its problems, a labor dispute has seen service providers, including catering, take strike action in recent weeks.

“Prelude is a multi-decade project and its success will be measured by delivering sustained performance over the long-term,” a Shell spokeswoman said by email. The company has begun the process of hydrocarbon restart, she said Thursday, with timelines for a resumption of production and shipment to follow.

Gorgon, on Western Australia’s Barrow Island, is the most expensive LNG project in history at $54 billion. Yet Chevron now needs to undertake a staggered shut down of all three production trains at the plant after damage was found in propane kettles that are key components in the liquefaction process. The U.S. major on Thursday announced a delay to the restart of one shuttered train at Gorgon to allow more time for repair work.

“Chevron and the regulator share the same goal of maintaining the safety of our workforce and operating facilities,” the company said in a statement. “We continue to provide natural gas to the Western Australian domestic market and LNG to customers under our contractual commitments.”

Tax Take

Outages at Prelude and Gorgon could further dent revenue from Australia’s gas exports, which the government is forecasting will drop by more than a quarter to around A$35 billion ($26 billion) in the 2021 fiscal year due to the Covid price rout. That in turn means a lower tax take, adding fuel to the argument that the country as a whole has not benefited enough from its gas export boom.

Australia’s Petroleum Resources Rent Tax, which taxes the profits of oil and gas producers, pulled in just over A$1 billion in the 2019 financial year, according to government budget papers. In contrast, Qatar’s royalty system boosts the state coffers by more than $20 billion a year at current production rates. Part of the reason for the PRRT’s relatively low returns is that energy companies can deduct the cost of building LNG plants.

In response, the industry says that a narrow focus on tax misses the broader role gas plays. “It is the total contribution of the investment made into Australia’s economy that should be taken into consideration when evaluating the government’s return,” Andrew McConville, Chief Executive Officer at industry body the Australian Petroleum Production & Exploration Association, said by email.

Meanwhile, an over-build of LNG capacity on the east coast is often blamed for lifting domestic gas prices, with Australian manufacturers forced to compete for supply with three major export projects in Queensland. The east coast market faces a supply shortfall from 2027, according to BloombergNEF analysis, a prospect that has raised the counter-intuitive possibility of building LNG import terminals to help fix the regional supply imbalance.

Drillers say the best way to get prices down is to bring more resources to market. Santos Ltd. is awaiting a final decision in September on whether it can proceed with its Narrabri project, which it says can meet about half the gas needs of New South Wales, the country’s most populous state. Meanwhile, plans to develop huge shale gas reserves in the Northern Territory are seen as a potential long-term solution to the east coast’s gas needs.

Future of Gas

Drilling plans like those are at the center of a debate over the country’s energy direction following the pandemic. Prime Minister Scott Morrison is pushing for a “gas-fired” recovery from the virus and has embarked on a process to streamline the environmental approvals process.

Australia’s oil and gas industry could lure as much as A$50 billion in investments that would create 5,000 jobs and about A$800 million in annual spending in local communities, according to APPEA, which is recommending the government offer more incentives to energy companies.

In contrast, groups like Beyond Zero Emissions say the pandemic gives Australia the opportunity to pivot to renewables, capitalizing on the country’s natural advantages in sun and wind to promote an economic revival driven by clean energy investments.

“We are at a crossroads,” AI’s Bennett said. “This time really allows us to look back at what we’ve done wrong in the past and what has worked in the past. And making big long-term investments in fossil fuels -- I just don’t think that checks out any more.” For Bennett, those investments would also be incompatible with Australia’s Paris Agreement climate goals.

Writedowns

The pandemic may see demand for LNG fall by as much as 5.3% in 2020, BloombergNEF analysts said in an Aug. 27 report, but they still see potential for consumption of the fuel to almost double by 2040 led by economic powerhouses China and India. Shell’s Chief Executive Officer Ben van Beurden said on an investor call in July that he expects a 4% growth rate for global LNG demand over the long-term.

​Still, the virus is causing pain in the short term: Australia’s LNG export revenues fell 16% in the second quarter of 2020, while production was at its lowest in nearly two years, consultancy EnergyQuest said in a report Monday. Oil and gas price outlooks have been slashed, causing the industry to write down billions worth of LNG assets in Australia. Leading the way was Shell, which in June took impairments of $8 billion to $9 billion in its gas business, mostly around Prelude and the Queensland Curtis LNG plant.

To be sure, the LNG projects are designed for decades of use, so even outages that last several months like the ones Prelude and Gorgon are suffering may eventually be seen as blips. And the $200 billion poured into Australia’s gas infrastructure over the past decade has another benefit -- future projects can piggyback on what’s already in the ground, according to Daniel Toleman, an oil and gas sector analyst at Wood Mackenzie Ltd.

“The main advantage of the next group of Australian projects is that they use existing infrastructure, so a lot of capital has already been spent,” he said.