Far Flung Flotation
The project will be a 50-50 joint venture between Exxon Mobil Corporation (NYSE:XOM) and BHP Billiton Limited (NYSE:BHP). The final investment decision is expected in 2014 or 2015. The plant is going to process and export LNG off the shore of Scarborough in Northwest Australia; the 495 meter field which was discovered more than 30 years ago contains reserves of up to 283 billion cubic meters of gas. The project is expected to start production in the next seven to eight years and has a potential to increase Australia’s current production levels by 30%.
Due to the remote location, Scarborough was not the favorite destination for the plant, but with the development of Pilbara’s existing LNG processing hubs, it has emerged as a valuable working field. Moreover, the advancements made in FLNG technology have made the developments of relatively smaller fields located in remote offshore areas feasible. Shell’s Prelude and Concerto fields are also at remote locations and contain liquids rich gas that has a volume of 84.95 billion cubic meters.
Australia’s LNG sector has been attracting investors from all over the world – particularly the leading oil companies from both the developed and developing world. Royal Dutch Shell plc (ADR) (NYSE:RDS.B) and Malaysia’s national oil and gas company, Petronas, have also started Floating LNG projects in the country. In Australia, Shell is working on a Prelude LNG vessel project, which will be operational in 2017 and is going to be the world’s first floating LNG plant. Shell made its Prelude discovery in 2007 while another field called Concerto located nearby was discovered in 2009. The estimated cost of Shell’s Prelude project is around $11.4 billion.
While Exxon Mobil Corporation (NYSE:XOM) and BHP Billiton Limited (NYSE:BHP) have not given any cost estimates yet, we know that the annual production of their planned FLNG vessel is more than twice that of Shell’s, so their CapEx requirements are also going to be significantly greater than Shell’s. But the Scarborough facility’s projected output should scale with initial cost.
The Rise of Australia
Qatar currently holds the crown as the world’s largest LNG exporter, but by 2020, Australia, with $190 billion worth of LNG projects in progress, could very well dethrone Qatar and emerge as an LNG powerhouse fueling the ever hungry Asia Pacific economies sitting nearby. One of the biggest concerns for FLNG, which has never been used for full scale commercial purpose, is the operation of the vessel under stormy conditions. But Australia’s relatively calm coastal waters make it a good match for FLNG installations.
However, Australia is certainly not as lucrative as was earlier believed. While the country’s proximity to Japan, Indonesia, India, China and Singapore give it a competitive advantage, other markets, particularly North America, are also tentatively pushing towards exporting LNG —Cheniere Energy, Inc. (NYSEMKT:LNG)’s Sabine Pass Liquefaction LLC is the only LNG export terminal to obtain an export license, and Cheniere is still wrangling with Congress over who they can export to.
Furthermore, the strong Australian dollar and rising labor costs are also not helping. Firms have to continuously reassess their budgets – which in Australia translates into a cost blowout. In Australia seven LNG plants are currently under construction that will start in 2014 or later, of which four projects have recorded significant increase in costs of 15% to 40%. All the while, labor costs have been increasing. And this is not likely to improve for U.S. firms as currency arbitrage will continue to make it more difficult to export profit home. With the Chinese and Aussies now officially settling their trade directly, the CurrencyShares Australian Dollar Trust (NYSEARCA:FXA) will begin to decouple from the U.S. dollar and align itself more directly with the Chinese yuan, which will continue to strengthen versus the dollar.
Oil and gas demand across Southeast Asia is set to double between now and 2030, and development of resources that bypass the need to import energy by ship from the Middle East is a big priority for China and the rest of ASEAN. If the cost structures of these projects become unprofitable for Western firms like Exxon Mobil Corporation (NYSE:XOM) and Shell while the dollar decreases in regional importance as the decade grinds on, do not be at all surprised to see them picked up by the likes of Sinopec and PetroChina.
The article Exxon Dives Into Australian Waters to Produce LNG originally appeared on Fool.com.
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