Origin Energy and ConocoPhillips Mull Downsizing Australian LNG Project on Weak Demand—Report

Demand Difficulties

Australian power provider Origin Energy and IOC ConocoPhillips are considering downsizing their planned Australia Pacific LNG (APLNG) liquefaction terminal in the state of Queensland, Australia, according to a report by Citigroup. The report states that, as a result of weak demand, it was now likely that Origin Energy and ConocoPhillips would consider a one-train final investment decision (FID) rather than the initially envisaged two-train FID, which would have underpinned a 4.5 million t/y LNG terminal. Citigroup pointed to subtle changes in the wording around the FID date for the APLNG project at Origin Energy's 24 August 2010 full-year results briefing as evidence to support its assertions. At the briefing, Origin Energy stated that although regulatory and technical issues were expected to be resolved by end-2010, construction of the terminal would not start until a customer was found for the project. Citigroup now believes FID on the APLNG project will be pushed back from end-2010 until mid-2011 with a completion date planned in 2015 as opposed to the originally planned fourth quarter of 2014. Origin Energy has denied Citigroup's assertions, however, pointing to previous comments by chief executive officer (CEO) Grant King, who stated the Australia Pacific LNG project would initially consist of two trains.

Origin Energy and ConocoPhillips have undoubtedly been facing difficulties in securing customers for the APLNG project as the raft of rival projects in the Gladstone area and on the coast of Western Australia have created fierce competition for buyers. The APLNG project has not yet signed a binding gas sales and purchase agreement (GSPA)—in contrast to the Gladstone LNG project being developed by Santos—which has signed binding off-take agreements with Malaysia's Petronas and France's Total for 5 million t/y of LNG (see Australia: 9 September 2010: Total Agrees to Buy 20% Stake in Santos Gladstone LNG Project). BG Group and Tokyo Gas have also signed a Heads of Agreement (HoA) for 1.2 million t/y of LNG from the Queensland Curtis Island project and negotiations and fully termed agreements are expected to be completed by end-2010. Shell is also going to sell LNG to PetroChina following the two companies' joint acquisition of Arrow Energy's Australian coalbed methane (CBM) tenements, in a deal announced in March 2010 (see Australia: 30 April 2010: Shell and PetroChina Get Australian Approval for Arrow Energy Takeover).

Aside from the difficulties in securing customers, there have been other signs that the APLNG project may slip from its project schedule. In May 2010, Origin Energy considered delaying FID on the project following the then Labor government's announcement of a Resource Super Profits Tax (RSPT). In August 2010, Origin Energy's Grant King stated that the election of a coalition government in Australia had created some uncertainties for the Queensland project. The Green Party's participation in the coalition could complicate efforts to win environmental approvals. Grant King stated that if the previous Labor government had been re-elected then state and regulatory approvals would have more chance of sticking to the end-2010 FID timetable. The CEO has also reiterated a readiness to discuss consolidation deals with other LNG projects in the area. All these signs suggest Origin Energy is having difficulties in moving the project forward, although the company does not yet appear ready to scale back the project's size.

Origin Energy is Australia's largest producer of CBM and has a world-class reserve base through its ownership of permits in Spring Gully, the Walloons coals, and the Peat Field in Queensland State. Origin appears to have feedstock to support the planned initial 4.5 million t/y facility, perhaps with reserves to spare judging by the company's decision to enter into an agreement to supply CBM from its ATP 648P and ATP 620P areas to BG Group back in February 2010 (see Australia: 25 February 2010: Origin Energy Teams Up with BG Group in Australia's CBM-LNG Sector). The issue for Origin Energy is not reserves—which on a proved and probable (2P) basis have increased substantially to 10,143 petajoules for the CBM project—but gaining customers and getting the requisite government approvals.

Outlook and Implications

In order to secure customers to underpin their projects, other LNG developers have adopted various tactics. Santos, for example, appears to have offered sizeable equity stakes in the LNG terminal in return for long-term gas supply deals. Santos' farm out of equity stakes in the terminal was also designed to help finance its investment costs. Farming out to Total allowed Santos to leverage the company's significant LNG marketing expertise to tap Asian LNG markets. BG Group has allowed CNOOC stakes in its upstream acreage as well as the terminal project in return for a binding supply deal, supporting the NOC's own efforts to grow its international reserves and production levels and integrate domestic and overseas projects. Other tactics such as fixing LNG prices at discounts to oil parity might also help to secure supply contracts, although ultimately this will lower rates of return on the terminal projects. In some cases, this may be worth it as securing supply deals is crucial to monetising reserves. Securing large deals can help projects benefit from economies of scale which can have benefits such as lower liquefaction costs.

Origin Energy has announced that it is targeting long-term sales agreements with top-tier customers—likely to mean Japanese utility companies, South Korean gas providers, and Chinese NOCs. However, many of the leading LNG consumers, such as Tokyo Electric Power Company (TEPCO), Tokyo Gas, Korea Gas Corp (KOGAS), and CNOOC have committed or signed large supply deals from other projects in Australia and the extent of their need for incremental supplies has now been reduced. Origin Energy could widen its search for buyers to India, although Australian LNG might struggle to compete with more proximate supplies from Qatar in this market. Countries in South-East Asia which are looking to develop LNG import capacity are another potential supply source, although the extent of their demand for LNG remains rather limited. Origin Energy could try to sell output to companies involved in LNG trading activities, thereby devolving the problem of marketing output, while leveraging ConocoPhillips' existing business relationships in the sector to secure deals.