IHS Global Insight Perspective | |
Significance | A merger between projects or some form of consolidation is expected in Australia for the planned CBM-to-LNG projects. |
Implications | There are considerable cost saving opportunities on offer from companies joining their projects together, but finding a way to maximise the synergies will prove challenging. |
Outlook | The companies involved in these projects are all looking to make final investment decisions (FID) in 2010 and for any collaboration to take place it needs to be agreed before the projects are sanctioned. Time is against the companies who will need to work together in the planning stages as there are opportunities to save huge costs by joining forces and IHS Global Insight expects there to be some form of partnership between projects if not full mergers agreed by next year. |
To Merge or Not to Merge
There are finally signs that the large CBM-to-LNG plants planned in the state of Queensland in the north-east of Australia may be ready to talk about consolidating projects. There are three major projects planned which seem almost certain to go ahead, but due to the global economic downturn, the tight credit markets, and the fact that utilising CBM-for-LNG has never been done on such a large commercial scale, the companies involved in the Queensland projects are now looking to spread the financial risk involved and start exploring opportunities to merge projects.
Martin Ferguson, Australia's minister for energy & resources said he expects consolidation to occur and has urged the industry "to do more through commercial negotiation". Ferguson told Dow Jones at the Australian Petroleum Production & Exploration Association oil and gas conference in Darwin: "I think there's going to be a smaller number at final investment decision time". His voice is echoed by officials at oil companies leading the projects. Santos chief executive David Knox said that the company would welcome collaboration and he was quoted by Upstream as saying that "It makes a lot of sense for us", in terms of improving capital efficiency and reducing the projects’ environmental impact. Ryan Lance, senior vice-president of international exploration and production at ConocoPhillips, told Dow Jones that he expects "some natural shuffling" to occur between projects. He added: "Certainly, we're looking to work with the other projects that are there...from the upstream, the midstream and the downstream side of the business." The reasons for consolidation are straight forward; these mega-projects are hugely expensive and by joining forces companies could expect to cut capital costs significantly, while reducing the environmental impact of their projects. One of the planned projects, a 50:50 joint venture (JV) called Australia Pacific LNG (APLNG), which involves domestic energy company Origin Energy and U.S. supermajor ConocoPhillips, has announced total investment for the project could be as much as US$25 billion (A$35 billion). In May, Malaysia's NOC Petronas paid US$2.51 billion to secure a 40% stake in the planned Gladstone LNG (GLNGTM) liquefaction plant on Curtis Island, Gladstone in Queensland with its partner, Adelaide-based firm Santos. They submitted a draft environmental impact statement (EIS) in early April and expect it to be open for public consultation in a "matter of weeks". Late last year engineering company Bechtel was awarded the front-end engineering and design (FEED) contract for the downstream component of the GLNG project.
Outlook and Implications
The main concern for the companies involved in the CBM-to-LNG projects is coming to an agreement with proposed merger partners in what is now quite a short timeframe. Collaborating on these mega-projects to find the necessary synergies and cost cutting opportunities is time-consuming and all the companies planning CBM-to-LNG export projects are looking to reach their FIDs by the middle of 2010, with gas exports to commence by 2015 if not before. There is also the question of which projects could merge. There is speculation that Santos-Petronas and ConocoPhillips-Origin could collaborate, either by sharing pipeline and port facilities or by combining gas resources in a large-scale liquefaction unit to reap economies of scale. However, one partnership which may prove difficult is a merger between Britain's BG Group, which is operating the Curtis LNG project, and any involvement with Australia's Origin Energy, part of the APLNG project, after Origin repeatedly spurned BG's advances during takeover talks last year and eventually led to Origin securing the ConocoPhillips partnership. In February BG Group entered into an agreement with the Queensland government to acquire a 270-hectare site at North China Bay on Curtis Island near Gladstone. Engineering company Bechtel was last year appointed by BG as contractor of the Queensland Curtis LNG Project (QCLNG). In April BG concluded the takeover of Pure Energy for A$1.03 billion. The deal added further reserves to the prospective Walloon Coal Measures in the Surat Basin of south-east Queensland, as well as acreage in the Bowen Basin, which will be used as feedstock in the CBM-to-LNG project. Last month BG Group signed a deal with China National Offshore Oil Corporation (CNOOC), which will purchase 3.6 million t/y of LNG for a period of 20 years from the start-up of QCLNG. This is a considerable milestone in Australia's CBM-to-LNG industry as it is the first customer supply deal, ahead of all the CBM-to-LNG projects planned in Queensland.
IHS Global Insight has always thought there would eventually be some form of consolidation of the large-scale CBM-to-LNG projects in Queensland and expected talks on collaboration to start far sooner. This delay has put the projects at a disadvantage when it comes to meeting their own strict schedules. As the projects continue in their planning stages the companies need to step up and talk about the benefits of working together rather than continue with their own separate projects. The cost savings are apparent and now with government support coming from Martin Ferguson, it seems some form of collaboration should take place. Yet, time is of the essence and FIDs must be reached by the end of next year.