Global Insight Perspective | |
Significance | Wesfarmers has announced it will spend A$138 million (US$104 million) to build Australia's first LNG plant for the domestic market. A long-term gas supply agreement to support the facility has been reached with domestic upstream producer Santos, and Wesfarmers will also build two new gas-fired power plants to support gold mining |
Implications | The plant will be based at Kwinana, in Western Australia, and will produce 175 tonnes of LNG per day for consumption in remote power markets, and Wesfarmers is also hoping its output will serve as an alternative to diesel in heavy transport and industrial applications. The first domestic market for Australian LNG, this project represents an important test case. |
Outlook | Construction on the plant is due to commence in November 2006, with the start-up slated for the first quarter of 2008. Success in this project could open the door to another market that those developing Australia's gas often overlook, raising the prospect of projects whose economic merit has been questioned. |
A Groundbreaking Initiative…
It is ostensibly a simple solution to address a shortcoming in the national energy economy, but the plans announced by Wesfarmers today could end up hold far-reaching implications for Australia's energy sector. The diverse industrial group, headquartered in Perth, Western Australia, has revealed the details of the new A$138-million (US$104-milllion) initiative in its annual report, released today.
Accordingly, it will be building Australia's first LNG plant to service the domestic market. To be located at the site of Wesfarmers's existing liquefied petroleum gas (LPG) plant at Kwinana, south of Perth, the facility will produce 175 tonnes of LNG per day. This output will represent an alternative to those consumers who currently do not enjoy cover from the country's gas transmission infrastructure and those currently supported by conventional liquids.
The overland LNG deliveries will allow Wesfarmers to support the electricity needs of the country's most remote industrial locations: the primary mineral extraction industries. It has already outlined plans to build a new gas-fired power plant at the pit head of Barrick's Darlot gold mine. Another power station is due to be constructed at Anglo Gold's Sunrise Dam. Wesfarmers has also outlined the application of its LNG output in the transport sector, targeting the fuel needs of heavy transport vehicles and in the market of industrial gas users. All told, it is an ambitious scheme that will break new ground in a number of respects.
…with Far-Reaching Implications
Wesfarmers has secured an ideal supply of gas to support its plans in the form of local operator Santos's share of the Apache-operated John Brookes gas field. Under the terms of the contract, Santos will supply the Kwinana plant with 34.9 Bcf of gas for a 10-year period. With construction set to commence later this year, the first gas delivery is currently tabled for 2008. Wesfarmers will benefit from the lower costs enabled by deliveries through the existing Dampier-Bunbury pipeline. For Santos and those developing gas in Australia's offshore upstream sector though, this new initiative could hold the key to even greater revenues. Australia is sitting on as much as 130 Tcf of natural gas but the majority of these deposits have remained stranded as the economics of development have proven prohibitive (see. Australia: 30 June 2006:An Unconventional Approach to Australia's Stranded Gas Reserves: From Gorgon to GTL and Australia: 20 June 2006:Chevron Remains Confident in Gorgon's Future, Despite Mounting Costs and Regulatory Pressure). The prospect of access to the domestic market in Australia, either in isolated circles such as those Wesfarmers has initially targeted, but also more broadly as a truly national gas market emerges through increased demand and infrastructural innovation, implies the balance sheet for these projects is shifting. Although the export markets of Asia and beyond will remain the primary touchstone for commerciality, a strong showing from the new domestic initiative Wesfarmers has laid out could offer a route to complementary earnings that would push wavering investors over the line towards swifter development.
Outlook and Implications
The impact of such an upturn would be substantial, both for the would-be operators and the shape of the global gas supply balance more broadly conceived. However, it is increasingly clear that the path to commerciality not only can but must pass through Australia's domestic gas market. It has been suggested that in the run-up to this announcement, authorities in Western Australia are concerned that there will be no gas available for future domestic use given the massive export focus of LNG developments to this point. A 10% legislated allocation for the domestic market has been suggested. The rate of depletion and prevailing attention on national energy security may well compel such a policy development but Wesfarmers's project may well show that the returns from this market can be convincing in their own right.
Santos, which already supplies gas to the Telfer gold mine, has been quoted today as saying it is actively seeking additional Australian customers. In this pursuit, the costs of liquefaction need to be weighed against other possible delivery technologies. Indeed, in this calculation, the earnings from off-grid gas-fired generation may be shrinking as the domestic gas transmission infrastructure continues to expand. Wesfarmers has reached this prize first and it could prove particularly profitable in the short term given Australia's bullish primary industry forecasts.
However, as an alternative to diesel for heavy-duty vehicles, a notable share of the transport market, the LNG may be still more lucrative if prices for conventional liquids remain at their high rates and supply scarcity leads consumers to entertain diversification more seriously. However, that the shift to this fuel would necessitate major new investments will not be lost on hauliers facing bottom-line pressure today. The government may have to step in to push such a shift but it has already shown its willingness to support alternatives (see. Australia: 15 August 2006:Australian Government Offers A$2,000 Incentive for LPG-Powered Cars). Given these factors and the potential upside involved, the impression made on this market will be most closely scrutinised.