COLUMN-Floating LNG is Australia's future, but not a miracle cost cure: Clyde Russell

Fri May 9, 2014 1:12am EDT

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-- Clyde Russell is a Reuters columnist. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, May 9 (Reuters) - Building a fleet of the world's largest vessels has been touted as the solution to the high costs of developing the next phase of liquefied natural gas (LNG) investments in Australia.

But floating LNG, while worthwhile, may not be the all-encompassing panacea that major oil and gas companies are seeking.

There are currently seven LNG projects, worth an estimated $200 billion, under construction in Australia, enough to make the nation the world's largest producer of the super-chilled fuel by the time the last is commissioned around 2018.

These plants will add about 62 million tonnes of annual LNG capacity to the existing 24.4 million tonnes, which will catapult Australia's capacity past that of Qatar.

What is at risk is a so-called second wave of investment, worth at least $180 billion, that could almost double the LNG export capacity.

The oil and gas majors active in Australia have been out beating the drum of high costs recently, using an industry gathering in Perth last month to bluntly warn that unless labour, regulatory and other costs come down, Australia will lose out to countries like the United States, Canada and Mozambique for new LNG projects.

One of the mooted solutions is switching from land-based LNG plants to huge floating platforms, moored above gas fields, but containing all the equipment and abilities of a conventional LNG plant, just crammed into a much smaller space.

Royal Dutch Shell has already taken the plunge, with construction of its Prelude floating LNG vessel underway in South Korea.

It will be the largest floating structure ever built, weighing some 600,000 tonnes, which is double the largest sailing supertankers.

Prelude will also be almost 500 metres long and is built to withstand the category 5 cyclones that occasionally strike off the Western Australian coast, where it will be permanently moored.

But it's not clear that Prelude is any more cost effective than building land-based plants.

The estimated capital cost is between $10.8 billion and $12.6 billion for Prelude's 3.6 million tonne per annum capacity.

This gives a cost of $3.5 billion per million tonnes of annual LNG capacity.

This is more expensive than the three LNG plants being built on Australia's eastern seaboard that will be the first to use coal-seam gas as a feedstock.

The Queensland Curtis project, operated by BG Group has a capital cost of $2.4 billion per million tonnes of annual capacity, the Gladstone plant being built by Santos and Malaysia's Petronas is at $2.37 billion and the Asia-Pacific LNG plant of ConocoPhillips is $2.74 billion.

However, Prelude is competitive with the land-based plants being built in the north and west of Australia that draw gas from deepwater offshore platforms.

Inpex's Ichthys project has a capital cost of $4.04 billion per million tonnes of annual LNG capacity, Chevron's Gorgon is at $3.46 billion and its Wheatstone plant is at $3.25 billion.

FLOATING ADVANTAGE IS MORE THAN COST

What these numbers show is that Shell isn't saving a huge amount on building Prelude compared to land-based projects.

What the numbers don't show is that the Prelude field would never have been developed without floating LNG, as it's too small and too far offshore to be viable for a conventional platform and sub-sea pipeline to a land-based liquefaction plant.

This is the real advantage of floating LNG. It allows smaller, stranded fields to be developed at a competitive cost.

This is why GDF Suez and Santos are considering the technology for their Bonaparte field, and Exxon Mobil and BHP Billiton are doing the same for the Scarborough reserve.

The decision by Woodside Petroleum to look at floating LNG for its Browse field is perhaps different, as the company initially planned building an onshore facility, but ran into environmental objections and cost escalations to the point where the economics no longer stacked up.

While floating LNG may not get around all the cost problems associated with doing business in Australia, it does allow the development of fields that would otherwise be uneconomic.

It's for this reason the giant vessels are more likely the future, rather than the problem that labour and other costs in Australia are too high. (Editing by Muralikumar Anantharaman)

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Comments (2)
Psychologist wrote:
Regulatory and labor costs will have to go down for Australian LNG projects to work long term. Australia has a well-trained labor force, but $170,000 per year for oil and gas workers is exorbitant.

May 09, 2014 11:37am EDT  --  Report as abuse
Psychologist wrote:
Regulatory and labor costs will have to go down for Australian LNG projects to work long term. Australia has a well-trained labor force, but $170,000 per year for oil and gas workers is exorbitant.

May 09, 2014 11:37am EDT  --  Report as abuse
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