A Review of the Current Australian Natural Gas Industry

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Researched by Industrial Info Resources (Perth, Australia)--Australia may have seen the last of the Oil & Gas Industry mega-projects as a result of soaring costs, unexpected delays, political pressures, environmental permitting and international competition, but even when these projects are operational and producing, Australian manufacturers still face the strong possibility of domestic gas shortages and high prices as the gas heads offshore.

Chevron Corporation (NYSE:CVX) (San Ramon, California) Chief Executive John Watson said the high Australian dollar--currently worth about $1.04 compared to about $0.86 when the Gorgon liquefied natural gas (LNG) project was given the go-ahead in 2009--contributed roughly one-third of the $15 billion (AUS$14.4 billion) cost blowout. Watson said the project also faced "fairly unique" logistics problems, moving larger-than-expected amounts of construction materials to Barrow Island, where the Gorgon LNG plant is being built.

The cost blowout has led Chevron's major partner in the project, Royal Dutch Shell plc (NYSE:RDS.A) (The Hague, Netherlands) to signal it will reconsider further investment in the "overheated" Australian market. Royal Dutch Shell Chief Executive Peter Voser has stated that the company would "take more time" before approving the development of the coal-seam gas-fed Arrow liquefied natural gas project in Queensland or an expansion of the Gorgon LNG project.

Shell also holds a 27% direct stake in the proposed Browse LNG project in northern Western Australia, and Shell and fellow partners are due to make a final investment decision on it by June. Analysts have questioned whether the project, estimated to cost more than $40 billion (AUS$38.5 billion) to develop, will prove economic in the current market.

Shell is believed to have been working on an alternative plan to exploit Browse via floating LNG, but this is something that Western Australian Premier Colin Barnett has said he will not allow.

Barnett says he will only allow Woodside Petroleum (Perth, Australia) and Shell, the dominant players in the venture with equity of almost 60%, to develop Browse via an onshore gas plant on the Kimberley coast, even if that option is not the most commercially viable.

Using FLNG for Browse would end the environmental controversy over the use of James Price Point, 60 kilometers north of the tourist town of Broome, but it also would mean that Kimberley indigenous people would lose access to a $1.56 billion (AUS$1.5 billion) benefits package if their land at James Price Point was not needed for the project, and West Australia would miss out on thousands of construction jobs and state revenue.

Speaking at an American Chamber of Commerce in Australia meeting, Alcoa of Australia Limited (Melbourne, Australia) Chairman and Managing Director Alan Cransberg expressed concerns that Australia needs to be making more out of its enormous gas reserves, instead of simply exporting it all overseas in the form of LNG.

Cransberg said he believed alumina refining in Australia can only remain competitive if the industry has access to plentiful supplies of affordable energy. He also made the claim that local manufacturers are being forced to call on state and federal governments to ensure a percentage of gas supplies are reserved for the domestic market, because energy companies are investing billions of dollars developing natural gas supplies that can be shipped north to Asia, where it attracts a better price.

"If we want to be a country with a diversified economy, then we have to have energy," Cransberg said. "I continually worry about whether we are just a quarry for the rest of the world or are we clever enough to combine some of the huge natural advantages we have.

"President Barack Obama, with all the U.S. shale gas, wants to create 3 million jobs for America, but we find all this gas and we want to pump it offshore."

Alcoa of Australia operates three alumina refineries and a number of bauxite mines in Western Australia, as well as mines and aluminium smelters in other parts of the country. A supply of energy is critical to Alcoa, with the company's West Australia refineries believed to consume about 24% of the state's domestic gas supply.

In an effort to secure a reliable source of energy, Alcoa has invested nearly $207 million (AUS$200 million) in smaller oil & gas companies.

Elsewhere, the Northern Territory town of Nhulunbuy is set to lose 800 jobs and half of its population after mining company Rio Tinto failed to secure gas to power its alumina refinery and bauxite mine. All known territory deposits have been sold or earmarked for higher-priced export LNG markets.

Rio has asked the Northern Territory government for half of its cheap domestic supplies, or it will shut the refinery. Queensland is facing fears the Gladstone LNG plant will funnel available domestic gas into lucrative LNG export markets, pushing up domestic demand and prices.

The Australian Gas Policy Report, prepared by Innovative Energy for DomGas Alliance, claims that Australia is not maximizing the benefits of having vast gas reserves when compared to other countries that are members of the Organisation for Economic Co-operation and Development (OECD).

The DomGas report claims that benchmarking illustrates that Australia clearly lags behind other countries in the OECD that have large gas resources in terms of creating value from that resource, and that this gap is likely to increase under the current scenario of unrestricted LNG exports at the expense of the domestic gas market.

The report suggests that countries with historically rich gas resources only export gas after they first develop their own domestic gas market, ensuring high gas consumption rates per capita and a high level of gas in total primary energy supply (TPES).

Gas exports and a healthy domestic market are not mutually exclusive but it is common to have a fairly large price difference between that of domestic and exported gas, a situation that does not look likely under current Australian policy.

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