Gorgon LNG Project Awarded Final Investment Decision in Australia

Gorgon LNG Sanctioned

This week U.S. supermajor Chevron has given the Gorgon LNG project its final investment decision (FID). Chevron is the leader of the consortium developing the Greater Gorgon gas fields, holding 50%, with partners Shell (25%), and ExxonMobil (25%). The project—which will begin with the Gorgon and Jansz-Io gas fields—has now officially been sanctioned, and the consortium has set a target of first gas by 2014 with initial capacity reached two years later. Since the announcement a number of contracts have been awarded, with numerous others to be won in the near term, as Gorgon LNG is the largest investment project ever in Australia.

Chevron chairman Dave O’Reilly made the project one of the company's key priorities this year, and in a company statement he said "With a total resource base of more than 40 trillion cubic feet of gas and an estimated economic life of at least 40 years, Gorgon will be a major contributor to our company’s future growth”. The LNG venture will comprise three trains of 5-million-t/y capacity, alongside a 300-terajoule/d gas plant that will be built on the Barrow Island Nature Reserve, within the site of the LNG project, to supply the domestic market.

The award of the FID comes as no surprise, as the project had been moving closer towards being sanctioned with a sequence of government approvals. Federal Environment Minister Peter Garrett gave his approval for the Gorgon LNG project at the end of last month, but his blessing was subject to 28 conditions designed to protect the environmental condition around Barrow Island, according to domestic newspaper The Australian. Garrett was only ruling on the approval of the third train, since the initial two-train development project had already received approval under the previous government of prime minister John Howard in 2007 (see Australia: 7 September 2007: Gorgon LNG Project Secures Environmental Endorsement from Regulators in Western Australia). A couple of weeks earlier the project received final environmental approval from the Western Australian government. The federal and state governments also recently approved five production licences for a massive gas export project.

Contract Bonanza

The Gorgon LNG project is expected to cost A$43 billion (US$37 billion) for the first phase of development, and since the FID announcement a series of contracts have been awarded. Upstream reports that the KBR-led Kellogg Joint Venture Group (KJVG) has been awarded the engineering, procurement, and construction management (EPCM) contract worth A$2.7 billion for the LNG downstream and logistics part of the project. The EPCM contract also includes the domestic gas plant. The Australian reports that Chevron will award about A$10-billion-worth of contracts in the next few months. This is in addition to the A$2-billion early works contracts that have already been awarded on the project. Last September, the onshore portion of the front-end engineering and design (FEED) study went to the KJVG, while last May, VetcoGray was awarded a contract to supply subsea equipment and support services for the project. The project could create up to 6,000 jobs during construction and around 3,500 permanent jobs. However, the majority of work is expected to take place in various fabrication yards throughout Asia that offer a hugely competitive labour-cost advantage. Construction of the project will be carried out in modules in order to minimise the effect on Barrow Island. Modular construction is a method involving the preassembly of components into transportable parts (see Australia: 16 January 2009: Chevron Tours Asia's Fabrication Yards for Gorgon Module Builds).

Outlook and Implications

The FID for the Gorgon project follows a host of gas sales and purchase agreements (GSPA) that have been signed with Asian consumers such as CNPC/PetroChina, India's Petronet, Japan's Osaka Gas and Tokyo Gas, and South Korea's GS Caltex. Asian consumers are keen for supplies from massive projects such as Gorgon, first because it is a much closer supply source compared to Qatar, so transit costs are likely to be lower. Second, the massive size of the project also means it can provide long-term LNG supplies that can help meet demand over decades from developing economies such as China and India. Third, Australia is a relatively secure country from which to source LNG, in contrast to other regional producers such as Indonesia where the government is increasingly re-orientating gas production towards the domestic market. Fourth, given that LNG prices in Asian markets are generally indexed to crude oil prices, producers and buyers alike in the region have suffered from price volatility over the past year and are looking for long-term contracts at stable prices from world-class projects such as Gorgon that will enable them to better manage their finances and plan their investments.

Fresh memories of the extremely tight LNG market in mid-2008, which pushed spot prices up to US$20mmBtu, and expectations that the global economy will rebound by 2012 and thus lead to a resurgence in LNG demand and prices have encouraged Asian buyers to go out and sign agreements for LNG supplies now to protect their long-term supply security and to take advantage of the current environment of weak demand and low spot prices to get better value over the long term. This could have been a key motivation behind the world's largest single buyer of LNG, Korea Gas Corp. (KOGAS), signing a preliminary 15-year agreement for the delivery of 1.5 million t/y of LNG from Gorgon with the option to extend the deal for five years despite the 30% year-on-year (y/y) drop in South Korea's LNG imports last month on weak demand.