Woodside considers US LNG plant

Six years after ditching its OceanWay plan to build an LNG import terminal in California to feed a gas-hungry America, Woodside this week swung 180 degrees with a bold move to join the throng of US-based LNG exporters in Texas.

Woodside's switch underlines the rapid change forced upon LNG suppliers in the wake of the flood of cheap US shale gas which is headed for customers in the same part of the world that have historically relied on places like Australia for their cargoes.

Woodside chief executive Peter Coleman says the Sempra Energy non-binding deal, to investigate the merits of a 10 million tonne a year LNG plant, is all about "sourcing the lowest-cost LNG globally".

For all the talk at this week's World Gas Conference 2015 that Australia will overtake Qatar as the world's biggest producer of LNG, the local industry's outlook is cloudy.

Oil prices are down, dragging with them LNG prices (usually linked to oil), yet construction and operating costs remain high and demand for the cleaner-burning fuel subdued in a soft macro-economic worldwide environment where dirtier coal remains the cheapest option.

The International Energy Agency this week tipped that revenues from Australia's wave of new LNG projects could be off by $US20 billion annually based on the halving of the oil price to about $US50 a barrel over the past year.

Industry players will counter-argue, of course, that few if any of them based their project's business case on $US100-plus oil, though the weaker revenue will feed into lower profits and dividends, and the scorn of analysts.

Yet it is the hangover from a period of soaring Asia LNG prices - the spot price touched $US18 per million British thermal units just over a year ago - that is causing lasting grief.

Prices since have dropped to about $US8/mBtu.

As the IEA pointed out on Thursday when it cut its year-old global gas demand growth figure to 2020 from 2.3 per cent to 2 per cent annually because of "largely unexpected" weak Asian demand, Australia's traditional LNG customers are no longer willing to pay a premium for their liquefied cargoes.

"That Asia will take one's gas at whatever price is no longer a given thing," IEA executive director Maria van der Hoeven said.

"The outlook for gas demand had become increasingly uncertain. In a world of very cheap coal and falling costs for renewables, it is difficult for gas to compete.
"For the fuel to make sustained inroads in the energy mix confidence in its long-term competitivenes (and role alongside renewables) must increase.

"Gas is an ally of renewables and that is something that more people should realise."

Adds Isabelle Kocher, deputy chief executive of diversified French energy company Engie (formerly GDF Suez): "We have to promote an integrated (energy) solution and gas has its place.

"(The industry must) innovate and invest to protect the image of gas".

Ms van der Hoeven pointed to 20 gigawatt of installed gas power generation in India that was largely idle because cheaper coal was preferred.

Returning utilisation to 2010 rates of about 60 per cent, she said, would add 15 billion cubic metres of gas demand. It was up to industry to convince India, with an inability to pass on higher fuel input costs to customers, that cleaner gas was worth the short-term cost impost over cheaper coal.

The IEA warning adds to the complexities facing Australia's gas industry, just as a glut of new local LNG production is about to hit the market to usher in a "golden era".

Origin Energy managing director Grant King, whose company is one of the three Gladstone LNG projects' co-owners, is more upbeat though he concedes the "queue" of the next wave of LNG developments "will take longer to clear".

Mr King, who is also chair of next April's LNG18 conference in Perth, says commentators are too often fixated on the percentage figures, and not the underlying numbers.
Pointing to the IEA's reduced annual average forecast of 2 per cent, Mr King said gas depletion was also running at 5 per cent.

The IEA forecast sees gas demand increase from 3495bcm to 3926bcm by 2020, a 431bcm rise equal to about 315 milllion tonnes of LNG. China is expected to account for 136bcm of the increase.

The wave of Australian LNG projects under construction led by Gorgon (15.6mtpa) is largely fully contracted, and will absorb most of the forecast gas demand growth though remain exposed to price movements.

It is the next wave of projects that most expect will be left on the drawing board, an opportunity Mr Coleman wants to capture by ensuring the Woodside-led Browse floating LNG development is in production by 2021, when he sees a supply side window opening up because competitors have shelved their ventures.

The Sempra deal, if it goes ahead, should provide Woodside with LNG from a different region and cost structure, part of Mr Coleman's strategy to expand the size and scope of his company's customer offer.

It is a hedge both for higher-cost but high quality Australian production and for regional movements in gas prices, and a portfolio play for Mr Coleman who believes Asian buyers will always want some Australian LNG in their energy mix because it is the global gas industry's blue-chip brand.

Mr Coleman says $US11 is about the right LNG price to cover producers' cost but also satisfy customers, and grow demand.

But there is more to gas demand than trying to cut prices.

"It seems our industry had been more successful at developing more supply than more demand," Royal Dutch Shell chief executive Ben van Beurden told WGC.

What irks him, and Mr Coleman, is gas' reputation as a transition fuel as the world shifts from coal to renewables.

Shell is trying to expand gas' role as a road and marine transport fuel, away from a reliance on power generation.

It has also signed up with other European supermajors like BP, Statoil and Total in calling for a price on carbon, a move seen as effectively putting a tax on coal and therefore enhancing gas' price competitiveness.
Woodside says there also needs to be a focus on gas' superiority over polluting coal.
In one of the most talked-about speeches at WGC, Mr Coleman unloaded on the coal industry but also on his peers for failing to channel the conversation towards the benefits gas can play in cleaning up air pollution.

Mr Coleman said too often the conversation only focused on greenhouse gas emissions and ignored the more immediate problems of pollution, particularly in places such as China and India.

He pointed to official data that recorded the premature death each year of seven million people around the world because of air pollution.

"Our industry has historically been too timid to aggressively address the shortcomings of coal, but now is the time to stand up and we need to stand united," Mr Coleman said.

"We the gas sector must do more to highlight the benefits of gas over the product of our competitors.

"If we limit the conversation to one based on price, we fail our shareholders and we fail those who seek a reliable source of power while hoping to resolve issues associated with air quality and climate change.

"And remember, air quality is not a conversation we have in Perth but is a conversation our friends in China have each and every day."

The reporter attended WGC as a guest of the organisers of LNG18