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LNG: Here Come The Yanks

Commodities | May 24 2011

– Authorisation granted for US LNG export
– Shell to build the Prelude FLNG facility
– Xeres has Woodside confident re Pluto-2

By Greg Peel

As noted in The New Global LNG Dynamic, the Japanese earthquake suddenly provided some new impetus for Australia's burgeoning LNG industry, which was beginning to suffer from impatient disinterest and uncertainty from stock market investors. Japan has since confirmed it will not radically alter its nuclear ambitions, but LNG still offers Japan a safer alternative and the Japanese had always intended to include a ramp-up of gas as part of their longer term energy plan.

To recap, the world is currently oversupplied with natural gas which is making it even more difficult for Australian LNG projects to find buyer interest, and has kept the US natural gas spot price at GFC levels despite the interim surge in the price of oil. But global demand for LNG continues to grow a-pace. The problem at present is we've just seen a wave of new supply projects come on line.

Demand will shortly overcome supply however, given there is now a time gap until the next wave of supply projects coming on line, which includes various Australian offshore and CSM gas projects, such that a shortage is expected until 2014-15 when a rebalance is again expected. Australian projects are trying to take advantage of this supply gap as it entices contract buyers.

At the same time, the US has fallen in love with shale gas and is now madly developing projects across the country to also exploit growing gas demand out of Asia et al. Given the US already boasts abundant natural gas reserves of its own (a factor helping to keep a lid on the spot price), these shale gas projects are targeting LNG export opportunities. So the Yanks are also in the race with the Aussies. The good news, for the Aussies, is that US shale LNG exports are not expected to commence until 2016 – at least a year after the glut of Aussie projects is anticipated to commence export. This should give the Aussies the jump on locking in long term offtake agreements, but then after 2016 we're probably back to having too much gas again, at least until demand again catches up down the track. Barclays has called Asia's LNG demand potential “seemingly boundless”.

Last week Cheniere Energy Partners received authorisation from the US Department of Energy to export US domestic gas to anyone in the world who has, or will have, LNG import capacity. The announcement is no shock, but analysts at JP Morgan suggest it will go a long way to promoting US gas industry bullishness. Some projects have been deferred pending authorisation.

There is still a long way to go to reach the final approval stage, but Cheniere has reaffirmed its intentions to commence construction of an LNG export facility in 2012 and export its first gas in 2015, which is up to a year earlier than most analysts had pencilled in for US shale gas to hit the export market.

The US natural gas price curve has been quietly showing the first signs recently that it has the potential to rally, led by the longer dates, suggests JP Morgan.

In the meantime, Dutch-Anglo energy giant Shell has reached financial investment decision (FID) status and will thus go ahead with the Prelude floating LNG (FLNG) project in the Browse Basin off WA. Shell hopes to install multiple FLNG facilities across the globe over a period of 15 years.

FLNG effectively means building an LNG train on a boat and mooring it at the drill site. The alternative is that offshore gas is piped to the mainland or a nearby island, as is the case currently in WA, converted to LNG and then shipped out from the local port. FLNG allows both the gas to be converted on site and tankers to pull up alongside for loading.

The cost savings and efficiency gains are obvious, but then these FLNG facilities are no minor construction challenge. The Prelude FLNG vessel will make an aircraft carrier look like a tinny. It will be the largest barge the world has ever seen and weigh the equivalent of six aircraft carriers. It is being designed to withstand a one in 10,000 year storm.

[Who decides on these “one in whatever” year measurements? Brisbane was supposed to have suffered a one in 100 year flood in 1974 and then got another one 27 years later.]

The point is, of course, that here we have yet another example of the expansion of the supply-side of the LNG industry. Long term stuff indeed, but nevertheless we are reminded that Woodside ((WPL)), for example, is looking to develop its own Browse project one day amongst all the other offshore WA projects both locally and foreign-owned, and then there's the big CSM push on the other side of the continent which is as yet unproven.

On the subject of Woodside, the company's biggest challenge recently has been to find enough of its own gas to justify the building of a second LNG train at its Pluto project, offshore WA, and to avoid having to either buy in gas supplies or sell off equity. This is before we start even talking about Browse or Sunrise.

On Monday Woodside announced it has found some promising gas reserves at its Xeres-1 site, offshore WA, and the company had previously suggested that success at Xeres-1 would be enough reason to go ahead and order the extensive and costly equipment needed to build the second train.

It's all happening in Gas Land.

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