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LET'S STEP ON THE GAS

Australia has enjoyed a commodites boom buile on coal and iron ore. Now LNG holds out the promise of another bonanza.

Story Paul Garvey

Liquefied Natural gas. That's what the spruikers say will be the next great path to riches in Australia's remarkable commodities ride. If the billions of dollars worth of LNG projects on the drawing boards are realised, Australia will jump from being the worlds sixth-largest player straight into second place, behind Qatar. And that's what everyone with something to gain is counting on.

State premiers are jostling to attract investment and talk up prospects, energy companies are preparing to pump tens of billions of dollars into new developments, engineering groups are salivating at the thought of looming contracts, and analysts who have seen it all before are starting to believe the time has finally come for a sector that until now has seemed too hard and costly to count on.

Stretching in an arc from Western Australia's Burrup peninsula- the original home of Australia's LNG industry- across northern Australia down to Gladstone in Queensland's central coast is an array of LNG projects that are set to redefine the nations place in the global energy chain.

The glut of projects scheduled for development is poised for Australia to soar from an also-ran in international LNG production to be a bona fide challenger for Qatar's title of world's largest LNG exporter.

"There's no doubt the magnitude of the resource we're talking about here represents a game-changing shift, not just in the resources sector, but in Australia's industrial and economic future" says Belinda Robinson, chief executive of the Australian Petroleum Procuction and exploration association.

Australia has been known as a home to massive gas fields for decades, although to date those fields have produced only two operating LNG projects: the Woodside Petroleum-operated North-West Shelf project on the Burrup and ConocoPhillip's Darwin LNG in the Northern Territory.

The reasons for tardy development of Australia's gas reserves are many. For once, gas was long considered a nuisance found when the real target was more lucrative oil finds. The developments themselves, due to their complicated and costly nature, have often struggled to win the uniform support of the many joint-venture partners with interests in the projects. And, in Western Australia in particular, environmental concerns about the impact of such massive developments have led to some projects being embroiled in decades of bureaucracy.

But after years of false starts, there is growing consensus that Australia's LNG industry is set to at last begin realising its potential.

The recent signing of three key offake agreements by the partners in the Gladstone, Curtis Island and Papua New Guinea LNG projects has boosted expectations those projects will proceed. While details of those contracts are scarce, each deal- all signed with customers from Asia- will be worth tens of billions of dollars and they will all be among Australia's larger individual trade deals. Combined, they could be worth more than $100 billion over their lives.

For international energy companies looking to grow, there are few destinations as promising as Australia. It is that rarest of beasts - a country offering a world-class resource, a world-class governance system and open arms to foreign investment. Australia's two key gas expansion rivals are Qatar and Nigeria - the former only interested in keeping its resources for its state-owned enterprises and the latter boasting an oil industry where deadly militant attacks are seemingly a daily occurrence.

At a time when industries around Australia are scaling back and focused on survival, the LNG industry is poised to increase in size several times over.

That's despite the beating that credit markets have taken over the past year and a half, and despite the fact that LNG is what Wood Mackenzie analyst Richard Quin understates as a "pretty expensive business".

"We're not talking about a couple of billion dollars, we're talking tens of billions of dollars for the big projects and that's just the initial costs" he says.

For all the consternation caused by the global financial crisis, the international energy agency nevertheless expects to see the world's energy demand increase by 45 per cent between 2006 and 2030. Non-OECD countries account for 87 per cent of that growth, and China promises by far the most demand growth.

The gas share of that demand growth is expeced to increase as the world becomes more carbon conscious, with gas promising much lower emissions when used instead of coal in power generation.

While Qatar's production growth will absorb much of that market, there's expected to be plenty of appetite for Australian gas.

"The problem from a buyer's perspective is you don't want to be totally reliant on Qatar for your LNG volumes" an analyst with UBS Securities in Melbourne, Gordon Ramsay, says "From a portfolio viewpoint, countries do not want to be totally reliant on getting their gas from one seller. That bodes well for Australia".

Exactly how large Australia's LNG industry will become remains cloudy. Too many analysts have seen too many LNG projects pushed back too many times to be drawn into making firm estimates.

But there is increasing confidence around a handful of projects. Woodside's Pluto project has been developed with uncharacteristic speed thanks to the efforts of chief executive Don Voelte and will be in operation by next year. The Gorgon project, a monster in name and nature, is tantalisingly close to a development decision. The partners - international energy giants Chevron, ExxonMobil and Royal Dutch Shell - are expected to prove the projects development by the end of the year, after decades in the pipeline. Gorgon is estimated to cost as much as $50 billion to develop.

Similarly, a decision is due in coming months over the Papua New Guinea LNG development, a project that has been watched closely in Australia because of the interests in it held by locally listed companies Oil Search and Santos.

The remarkable evolution of Queensland's coal-seam gas industry from niche sector to LNG industry has been rapid, and while question marks remain over the sector's viability, most observers believe it will support at least one and perhaps two LNG projects in the medium term.

Assuming those projects are realised, LNG exports from Australia and PNG will multiply several times, enabling Australia to leapfrom from the world's sixth-largest player to outright second, behind Qatar, where a massive development program is doubling the gas giant's existing world-beating output.

If several wild cards in the Australian LNG portfolio, such as some of the more ambitious coal-seam projects and some of the less advanced LNG projects in WA, defy expectations and come to fruition, Australia could be challenging Qatar for the No. 1 position.

"We have the potential to get to the capacity of Qatar or even surpass it, but the big problem we have in Australia is that there are dozen's of projects that have to go ahead to do it," Ramsay says. "Clearly some will slow down and some will be shelved".

With the surge in production will come a surge in exports. According to statistics of the Australian Bureau of Agricultural and Resource Economics, Australia's LNG exports last year totalled $9.9 billion, placing the sector fifth behind Coking Coal ($US34.5 Billion), Iron Ore ($US33.7 Billion), thermal coal ($US17.6 Billion) and Gold ($US17.5 Billion).

While LNG's place on that export list will be dependent on commodity price fluctuations, the near trebling in exports could have it jostling with iron ore and coking coal as Australia's largest export.

With that increase will come a royalties bonanza for state and federal governments.

Wood Mackenzie's Quin predicts that the Pluto LNG project now under construction will generate $US9 billion in royalties out to 2033. And that is for the project's first train, or processing line; a second train is considered all but inevitable.

Pluto's first train is comparatively small in the scheme of LNG. The Gorgon project is almost four times as large and will have a longer operating life. Its contribution to government coffers will be several times that of Pluto's first train.

With the royalties on offer, it's no surprise the relevant state governments are increasingly beating the drum for LNG.

WA premier Colin Barnett has spent much of his time in office trying to facilitate LNG development around the state, while Northern Territory Chief Minister Paul Henderson takes particular pride in having lured Japan's Inpex into building the LNG plant servicing its Ichthys gas field to Darwin, instead of a geographically closer site in WA.

Queensland Premier Anna Bligh, who has watched her government's revenues slide as the state's coal industry is pummelled by the global slowdown, last week talked up the prospects of LNG to the state parliament's estimates hearing.

Bligh Compared the budding LNG industry to the state's coal industry in the 1970's and 80's, saying the sector could deliver more than 18000 jobs and billions in investment.

"Modelling shows that LNG industry in 10 years could add more than $3 billion, or around 1 per cent, to gross state product when it produces 28 million tonnes a year," Bligh said. "This is an exciting time. We are on the cusp of something very special".

JUST AS SECUCED BY THE LURE OF LNG ARE ENGINEERING AND CONTRACTING GROUPS AROUND THE COUNTRY, ALMOST ALL OF WHICH HAVE SUFFERED FROM A DOWNTURN IN WORK OVER THE PAST FEW YEARS.

AMONG THE BETTER PLACED IS NEPTUNE MARINE SERVICES, A PERTH-BASED COMPANY SPECIALISING IN PROVIDING UNDERWATER SUPPORT TO THE OIL AND GAS INDUSTRY.

"YOU START LICKING YOUR LIPS, BUT THEN YOU START PANICKING ABOUT WHERE YOU'LL GET ALL THE RESOURCES FROM," NEPTUNE CHIEF EXECUTIVE CHRISTIAN LANGE SAYS.

NEPTUNE HAS ALREADY SECURED CONTRACTS TO WORK ON PLUTO, WHILE THE COMPANY RECENTLY CARRIED OUT AN UDERWATER SURVEY OVER THE ENTIRE 900 KILOMETRES OF SEA FLOOR BETWEEN INPEX'S ICHTHYS FIELD AND THE PROPOSED DARWIN SITE.

THE COMPANY HAS GROWN FROM SIX STAFF TO 650 SINCE 2006, AND LANGE EXPECTS TO DOUBLE THAT NUMBER IN THE COMING YEARS. "WE'RE BEEFING UP OUR MANAGEMENT AND ENGINEERING CAPACITY, AND WE'RE LOOKING AT A RANGE OF ASSETS AND A RANGE OF RELATIONSHIPS TO ENSURE WE'RE IN THE BEST POSITION TO PARTICIPATE" HE SAYS.

Despite the growing excitement, there remain plenty of headwinds facing the industry. Most critical is the hunt for customers.

The most recent offtake deals have given new confidence that the Queensland LNG aspirations of Santos and England's BG group will be realised. But for the others, they face an increasingly tight race to secure buyers. Unlike most other major commodities, where liquid spot markets exist, LNG developments generally need long-term clear contracts in place before the huge capital investments are made.

Global LNG markets are forecast to double in size over the next decade, but that projection has become hazier in the recent economic turmoil. Japan is by far the biggest buyer of LNG, accounting for more than 40 per cent of the world's imports, but has a stagnating economy.

Not only are the projects competing with other Australian developments to win buyers, they also face stiff competition from projects overseas.

The magic number appears to be 2016, the year when several LNG proposals are expected to converge on the world market.

"While on a macro level it is a very positive story and it's all going to benefit Australia, on an individual basis some projects will fall back and the actual phasing is quite uncertain. There's a lot of competitive tension in Australia over who wins the market, which is not infinite," Quin says.

"Beyond 2016, that's the point where we estimate the proposed supply starts to exceed demand. Beyond 2016, we're expecting a softening of price and at that point it becomes very uncertain over which projects will be next just because there are so many all gunning for the same spot."

The current offtake contract negotiations are being conducted in what observers describe as a true buyers market. Demand is far less certain than it was, and not too far over the horizon is a glut of projects, which threatens to oversupply the market. For the Queensland coal-seam gas hopefuls, they will face futher pressure from buyers uncertain about sourcing from a gas source that has never been used for LNG before.

Markets aside, the usual bureaucratic hurdles remain. On top of that, the federal government's proposed emissions trading scheme promises to be a cost impost not faced by LNG projects elsewhere globally - a proposition that has got under the skin of executives who see LNG as part of an emissions solution.

"It's a difficult game because of the magnitude of the investment and the long lead time, and the economics are very fragile, and we're under substantial pressure from other countries around the world." sayd APPEA's Robinson.

In her eyes, the emissions trading scheme will only add to the cost disadvantage Australian projects face against international rivals.

"If we were serious about really wanting to realise the full potential of the natural gas industry, we would ensure as a country that we don't load it up with unnecessary costs." she says. "If we were serious about this potential, we would also take real steps to disentangle the regulatory maze." she says.