By ROSS KELLY
BRISBANE, Australia -- More than $160 billion of bets placed
by international oil companies including Chevron and ExxonMobil
on natural gas in Australia are getting riskier, as the country
becomes the latest major energy producer to grapple with North
America's surging output of shale gas.
Once a global hot spot for energy investment due to its
political stability and large, untapped natural-gas reserves,
Australia's appeal has waned as labor shortages and a high
Australian dollar have trigger cost blowouts at flagship
Although those problems have been around for a while, they are
becoming more worrisome now that gas prices elsewhere have
dropped and buyers have more options for securing energy
"The industry has more than $160 billion of liquefied
natural gas investments currently in flight [being built]. But
upwards of another $100 billion in potential future projects
could be at risk," said Roy Krzywosinski, managing director of
Australia has long harbored ambitions of becoming the major
LNG supply hub for Asia and has over a dozen projects either under construction or on the drawing
board. The seven terminals currently being built should allow
Australia to leapfrog Qatar as the world's biggest LNG exporter
However, further supply
additions may prove harder to achieve. Costs are rising sharply
and first cargoes are being delayed at existing projects,
hurting returns on investment. These problems are making
companies wary of expanding or building new projects in
Chevron and partners Exxon and Shell have delayed work to
expand their $52 billion Gorgon project. Gorgon is Australia's
largest natural-gas resource, containing an estimated 50
trillion cubic feet of natural gas -- enough to meet US demand
for two years. Chevron is the project's operator and largest
A rival nearby project that has yet to get off the ground,
known as Browse, suffered an even bigger setback in April when
operator Woodside Petroleum scrapped plans for an onshore
gas-export plant because of high construction costs. Woodside
is now looking at new floating LNG technology that would process the
gas at sea, and this has delayed the project by at least two
years. Shell is also an investor in Browse.
Project delays carry large risks for companies like Chevron
as future supply from Australia would compete for customers
with US projects offering cheaper gas. LNG in Asia has
traditionally been sold via long-term contracts, with prices
linked to relatively expensive crude oil, whereas export deals
in North America are based on sharply lower domestic gas prices
there. Analysts think Australian gas-export prices may need to
fall by as much as 25% to compete with US gas prices.
Big LNG importers like Korea Gas and Japan's Osaka Gas have
signed long-term agreements with US terminals, diversifying
supply sources that until now relied heavily on Australia and
the Middle East.
"The focus is on the US now. The first [export] projects are under way [in the US],
and we expect more to come through," said Andrew McManus, a
consultant at UK-based Wood Mackenzie, which is forecasting
around 50 million tons of annual LNG exports from the US by
2020. That is equivalent to more than half of Australia's
projected supply of exports in that year.
In May, the US approved
Freeport LNG's $10 billion Quintana LNG-export project in
Texas, the second US development to move forward after Cheniere
Energy's Sabine Pass project in Louisiana. Both involve
converting old LNG import terminals into export facilities, making them cheaper to
build than Australian projects because infrastructure -- such
as pipelines and storage tanks -- is already in place.
To be sure, US gas exports remain a contentious issue in
Washington because of the potential effect on domestic users.
Canadian exports, however, are on the horizon beginning in
2017. Companies with big discoveries off the coast of East
Africa are also looking to start shipping gas by the end of the
Confidence in Australia's LNG industry suffered its heaviest
blow in December, when Chevron said the cost of its Gorgon
venture with Exxon and Shell had ballooned by 40% and that the
first shipments of LNG from Gorgon would occur in 2015, several
months later than planned.
Chevron largely blamed a 20% jump in the Australian dollar's
value since construction began in 2009, which
makes it more expensive to buy equipment locally, and bad
weather. But it also underestimated the wages needed to entice
workers to the plant site at Barrow Island, a nature reserve
off the coast of Western Australia state that is home to rare
turtles and birds. Chevron must compete with other LNG and
mining projects to attract workers to the remote location.
"Everything in Australia's been built. It doesn't look good
for new projects," says Noelle Leonard, a consultant at Facts
Global Energy. "We don't see any developments taking a final
investment decision for at least a year or more. And if they
do, the natural progression will be toward expanding existing
Woodside Petroleum's Browse leads a list of stalled
projects, which includes a joint venture between Shell and
PetroChina called Arrow Energy that aims to convert gas trapped
in coal seams to LNG for export in eastern Australia's
Rising costs for building LNG projects have become a
significant challenge for companies doing business in
Australia, Peter Voser, Shell's retiring CEO, told industry
leaders in May.
Despite the delays and a $15 billion increase in capital
costs for the Gorgon project -- damping returns and postponing
cash flow -- Chevron says Gorgon will still make money. The project's Asian customers are locked
into contracts typically lasting 20 years, guaranteeing demand
for the gas.
And the contracts are linked to the fluctuating price of oil,
which is up about 50% since construction began in September 2009
-- allowing Chevron and its partners to reap more for the gas
as long as oil prices remain high.
But in a sign the company's appetite for Australian LNG is
waning, Chevron said in December that a decision on whether to
start early design work on expanding Gorgon to include a fourth
gas-processing unit would be delayed by at least a year and
won't happen before the final months of 2013.
"We have the gas. It's just a matter of seeing where this
investment climate settles," Mr. Krzywosinski said.
Dow Jones Newswires