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Collaboration in the Carnarvon Basin
Can big players lose the ego and play nice for the greater good of Australian LNG?
Australia's LNG industry doesn't have a track record of collaboration. But challenges and opportunities in global LNG supply and demand is necessitating new ways of working. We investigate the drivers and barriers of collaboration, and ask: can the big players drop the ego and learn to play nice for their mutual benefit?
Curtis Island, Queensland, is home to three mega LNG plants. These plants line up side by side along a 4 kilometre stretch of the beach. Each plant has its own pipeline, offloading, storage and auxiliary infrastructure. Nothing is shared. There isn't even an access road that directly connects all three sites together.
It's not a unique situation in Australia. In the northwestern Carnarvon Basin there are four separate LNG plants that can produce around 50 million tonnes per annum. Like our previous example, these plants share proximity, but not infrastructure.
And finally, off the northern tip of Australia, nearly US$60 billion was spent in a race to construct two greenfield LNG projects in the Browse Basin that are producing gas from what is widely assumed to be the same reservoir.
Thus when the industry starts to talk about a new wave of collaboration, it's easy to be sceptical. But on the other hand, the potential synergies are obvious. So, can it really happen?
Collaboration is notable by its absence in Australia's oil and gas industry. And it has resulted in billions of dollars in value destruction for all involved.
Can Woodside and Chevron play nice?
Earlier this year at Australia's largest oil and gas conference, APPEA, Chevron floated its idea of a "Trans-Carnarvon Trunkline" concept dubbed the TCT. The TCT is Chevron's vision of opening up existing gas processing infrastructure in the Carnarvon Basin to third party access. Given the basin is littered with abundant infrastructure and stranded gas fields, it makes a lot of sense on paper.
Shortly thereafter, Woodside announced a detailed route for their proposed Scarborough development pipeline. It ran close to several undeveloped discoveries. Woodside suggested the pipeline would be open to third party access if the participants were able to demonstrate firm plans to cooperate within its development timeline.
Whether by coincidence or by design, these two parties have arrived at the same conclusion – working together makes a lot of economic sense. The sceptics immediately pointed out that both Chevron and Woodside had the opportunity to develop their respective Wheatstone and Pluto LNG projects together, but couldn't agree on timing and developed the adjacent fields separately.
But perhaps the lessons of the past have been learned, and this time it will be different.
Things are looking up for Australian LNG, but challenges remain
Two significant changes since the last big wave of Australian LNG are:
- A strong future pipeline of globally cost competitive LNG supply projects;
- Greater economic discipline from companies in the sanctioning of new projects.
On the horizon is a wave of new LNG projects that offer low cost and competitive returns, driven by the strength of LNG demand in Asia and Europe. These highly cost competitive projects are all targeting FID over the next few years, while only the best projects will attract corporate funding.
Australia is a high-cost upstream environment, so to get the next wave of investments moving, it needs to seek innovative ways to be competitive. Enter the notion of collaboration in the Carnarvon. Western Australia's advantage is that a significant amount of LNG infrastructure already exists and is operational.
That's the good news. The bad news is that the existing infrastructure is not set up to optimally develop the 75 trillion cubic feet of undeveloped resources. Left in status quo, the basin will be challenged to offer new globally cost competitive sources of supply.
There are four LNG processing facilities in Western Australia, with two operated by Woodside (the North West Shelf (NWS) and Pluto) and the other two by Chevron (Gorgon and Wheatstone). All have different equity participants. The most mature project is the NWS, and we believe spare capacity in the facility will be available by 2021. After that date it will require third party gas to remain at full utilisation.
Routing third party gas through an underutilised facility may not be a problem elsewhere in the world. But in our historically non-collaborative region, this places the participating companies in unchartered territory. It requires both the NWS Joint Venture and third party gas suppliers to agree on development timing, and an acceptable tolling fee to utilise the infrastructure.
This is not straightforward. Each joint venture participant has competing interests in how the plant's capacity is utilised, preferably with their own gas first. Other participants without equity gas to bring to the party would like larger tariffs for use of the infrastructure. The complexity of agreeing commercial arrangements that suit all parties is at the nub of why NWS collaboration has historically tended to be an oxymoron.
The NWS joint venture is the first to face this challenge, but it's not the only one – the other LNG projects in the basin will be soon having similar conversations.
Keeping existing infrastructure at full capacity is generally cheaper and simpler than constructing a green field project. Collaboration is key to optimising the supply of new feedgas, thus allowing Australian LNG to remain competitive against other global sources of supply.
Who else stands to benefit from collaboration?
Depending on the lens you look through, there are a number of parties who stand to benefit from more collaboration.
Firstly, it allows upstream participants to commercialise undeveloped gas resources. The discovered resources on the Exmouth plateau, Chevron's Clio/Acme fields and the Western Gas Equus fields are not big enough to justify their own infrastructure, so the only way to commercialise these fields is via third-party infrastructure. Other discovered resources in the Carnarvon Basin can also benefit from Woodside's proposed third party trunkline.
Secondly, the LNG facility owners can be key beneficiaries. Facilities such as the NWS and Pluto require new sources of gas in the future to stay full. To not maximise the capacity of these hugely expensive facilities would leave gas in the ground and money on the table. And that will require third-party access.
Ensuring a continued and optimised supply of feedgas will benefit the Australian taxpayer via larger and longer corporate tax and royalty streams. If a tolling fee cannot be agreed and – once again – the benefits of collaboration are abandoned, these facilities will be incrementally taken offline and mothballed. The facility most at risk is the NWS and the government would lose out on millions of dollars of tax revenue.
Lastly, the service industry and local economy would also benefit from increased cooperation. The four Western Australian LNG projects not only provide domestic gas security but employment for a wide range of service companies and support the local economies and communities. These benefits would only grow if more fields get developed in an economically sustainable way.
So what needs to happen next to make collaboration a reality?
Despite the history, we think collaboration has legs this time round. Woodside has said the NWS joint venture has agreed at a high level to toll the facility. Landing on an accepted tariff fee for utilising the NWS infrastructure is the next step. This is expected to be announced soon.
But the collaboration story has many angles. Woodside will also construct a 3km pipeline interconnector between the NWS and Pluto facilities. A right sized interconnector will enable flexibility and co-operation between the two facilities to maximise output.
Chevron has put forward the idea to develop its Clio/Acme fields via Woodside's offshore Pluto platform to shore. The gas will then flow through the proposed interconnector and be processed at the NWS. Chevron will achieve this through paying the relevant parties a tariff for using their infrastructure – a tangible example and intention of planned collaboration in the Carnarvon.
These are only the first steps and hopefully the catalyst to creating a truly interconnected and collaborative basin. We see the need for further infrastructure investment to physically connect the Wheatstone, NWS and Pluto facilities together and enable gas molecules to be diverted to the facility with spare capacity.
Ultimately, we see the key infrastructure being owned and operated by an entity without interests in the upstream fields and who is ambivalent to whose gas is prioritised first. A level playing field is the end-game, and is now being spoken of in serious terms in Perth and other global energy hubs such as Houston and London.
So can this time really be different? Can the Carnarvon Basin rewrite a history of corporate ego leading to huge value destruction?