Few can argue that Australia is not hydrocarbon-rich and well-positioned to reap the rewards of its onshore and offshore assets.

Even as clouds darkened over the oil and gas sector with falling oil prices, a few rays of sunshine emerged Down Under as a long-awaited LNG project marked a milestone. The departure in January of the first LNG vessel from Gladstone Harbor ushered in the BG Group-led Queensland Curtis LNG project after four years in the making. The $20.4 billion project, with LNG destined for Asian markets, became Australia’s fourth operating LNG project and the first of three coal-seam-gas-(CSG)-to-LNG projects to be commissioned in Queensland. If all goes according to plan, Origin Energy’s Australia Pacific LNG project and the Santos-steered Gladstone LNG project are scheduled to start up this year.

Plus, companies have signaled interest in acreage offshore Western Australia by gaining permits as part of an offshore petroleum acreage release. Even Apache Corp., which has been shedding assets—including its equity interest in Wheatstone LNG to Woodside Petroleum in a $2.75 billion deal—was in on the offshore action alongside Statoil, Santos Offshore, Origin Energy Resources and others.

“Australia has multiple factors that attract investors. It has a long-standing oil and gas industry with well-developed infrastructure along with a well-characterized and understood geology and a stable fiscal and regulatory environment,” said Joseph Gatdula, GlobalData’s senior upstream analyst covering Asia-Pacific and the former Soviet Union. “In addition, there are legal frameworks for due process with low corruption, which are significant risks when operating in less transparent countries.”

Fiscal discipline

Low oil prices, costs and planned budget cuts have led conversation in the industry worldwide. Australia is no exception.

“The situation in Australia is challenging. High operational costs, particularly labor costs, have been an ongoing challenge to the oil and gas industry in Australia, magnifying the current tough economics faced by operators,” Gatdula said. “Upstream companies will protect profits by reducing costs on everything from operations to exploration budgets. The outlook in Australia mirrors much of the global outlook, with reductions of 10% to 20% of capex budgets and the cancellation of marginal projects.”

But companies are already finding ways to operate smarter and more efficiently. The cost constraints have put a renewed focus on fiscal discipline.

“Concerted efforts have been made to increase employee productivity through workplace law amendments along with other efforts to streamline domestic pricing mechanisms. Fiscal discipline has led to the cancellation of two major LNG projects, Browse LNG and Bonaparte FLNG, with expected combined costs of $55 billion,” Gatdula continued. “The Australian oil and gas industry has placed a significant stake in the development of FLNG as a means of reducing the project lifecycle costs for natural gas developments.”

Although he pointed out that lower initial costs and decommissioning liabilities have not been proven for FLNG, as the first full-scale project—Prelude FLNG—will come onstream in 2016, FLNG creates opportunities to exploit smaller discoveries once considered uneconomic investments because of infrastructure. That was among the reasons why Woodside Petroleum, operator of the Browse joint venture (JV), opted to pursue FLNG to develop estimated gross contingent resources of 422 Bcm (14.9 Tcf) of dry gas and 441.2 MMbbl of condensate from the Brecknock, Calliance and Torosa fields offshore Western Australia. The development, which could enter the FEED phase in mid-2015, is targeting a final investment decision (FID) in mid-2016, later than originally planned.

“We see the decision to move FEED to mid-2015 as a positive one for the project as we remain very committed and focused on taking it forward,” Woodside CEO Peter Coleman said in a conference call. “Why the change? We've seen, obviously seen, a very substantial shift in market conditions, and we actually believe it provides a good opportunity for us to seek significantly lower cost outcomes for the Browse FLNG development, primarily drawing on lessons learned from other projects and other cost changes that we're seeing in our own business.”

‘Slight advantage’

Currently, Australia has six LNG plants under construction—Wheatstone, Greater Gorgon, Prelude and Ichthys offshore Western Australia as well as Australia Pacific and Gladstone in Queensland. Combined, the LNG projects under construction are valued at more than $200 billion, according to the Australian Petroleum Production & Exploration Association.

Three LNG projects are scheduled for startup in 2015. Chevron’s Gorgon project was about 87% complete in November, according to Chevron Australia’s website. Project partners are Exxon Mobil, Shell, Osaka Gas, Tokyo Gas and Chubu Electric Power.

“Seven of the 10 wells at the Jansz-Io Field and seven of the eight wells at the Gorgon Field are ready to produce,” Chevron said. “The Jansz-Io Field is now connected to the LNG plant following the final tie-in welds between the offshore and cross-island pipeline systems. The Gorgon pipeline system is being prepared for a similar tie-in.”

The Australia Pacific CSG-to-LNG project—a JV partnership between Origin, ConocoPhillips and Sinopec—is due online mid-2015 with a capacity of 9 million tonnes per annum (mtpa). The Santos-operated Gladstone LNG project, another Queensland project, also anticipates its first LNG cargo in 2015. Working with Petronas, Total and KOGAS, Gladstone will be capable of producing 7.8 mtpa of LNG.

The other LNG projects have targeted start dates in 2016 and 2017.

Browse was not the only project to be pushed into a holding pattern. In October Petronas warned of a potential 15-year delay to its Pacific Northwest LNG Project in British Columbia, Canada, unless a more favorable deal could be brokered with government.

LNG projects still on the drawing board face the biggest challenges in the race to reality, Geoffrey Cann, national director of oil and gas in Deloitte’s Brisbane office, said in an Oil and Gas Investor Australia article.

“I can’t comment on specific projects (such as Browse or Pacific Northwest LNG). But I think the basic observation is that when the industry revenue line is cut because of big price movements, then any project that is pre-FID, without ownership sanction or gas contracts lined up, or might not have gas supply immediately tied up, are being asked to reevaluate the economics of those projects,” Cann said. “In that case those projects, regardless of what country they are in, are going to come under tighter security risk parameters than legacy projects already under construction. And only those projects with the best economics that are closer to FID with capital lined up might continue on.”

Gatdula added that projects with long-term contracts already in place will be fine.

“However, look for crude-linked gas prices to adjust within the year, which will affect contract prices moving forward for projects coming online in the 2017-2020 timeframe,” he warned. “As Asia stills supports the highest natural gas prices, expect Australia’s LNG industry to have a slight advantage over other global LNG producers because of its proximity to this demand center.”

But demand will play a critical role.

More pressure

The U.S. Energy Information Administration (EIA) projects gas demand in China alone to jump to 221 Bcm (7.8 Tcf) in 2020 before skyrocketing to about 481 Bcm (17 Tcf) by 2040. Imports of natural gas in the form of LNG and from several new and proposed import pipelines from nearby countries are expected to meet the demand. The EIA said that Chinese companies already have signed long-term contracts to deliver at least 156 MMcm/d (5.2 Bcf/d). Most of the contracts are with Asian firms with LNG sources from not only Australia but also Indonesia, Malaysia and Papua New Guinea. But buyers from Korea and Japan—the world’s largest LNG importer—are also securing or seeking to secure supplies.

In 2012, Japan consumed 130 Bcm (4.6 Tcf) of natural gas, 95% of which was met by LNG imports sourced mainly by Australia and Qatar at 18% each, EIA data show. How much LNG Japan consumes in the future will depend on how many nuclear facilities resume operations following the Fukushima incident, which led Japan to short-term and spot cargo LNG.

Changing demand also could alter the situation for Australia’s LNG suppliers.

Slower than expected gas demand in China could put more pressure on LNG suppliers that are already trying to survive high costs amid an industrywide downturn.

“From 2015, LNG markets face rapid supply growth, led by Australia and followed into 2016 by the U.S. from the Gulf Coast,” Noel Tomnay, head of global gas and LNG for Wood Mackenzie, said in a report released in December. “Suppliers will be looking closely at Asia’s gas demand growth.”

This raises some concerns considering that gas demand in China—the world’s most populous country—grew slower than anticipated last year. The Wood Mackenzie report stated that China’s natural gas demand was expected to increase 17% over the 2013 level; however, demand grew less than 10% year-on-year.

In addition to efforts to tap its own gas resources, the country has turned to Russia—among others—to help meet its gas needs. In November, China and Russia sealed a $400 billion gas deal. The agreement followed one signed in May, when Gazprom and China National Petroleum Corp. signed a 30-year contract.

Already, “there are now real concerns that the Chinese market will struggle to absorb all of its contracted LNG, which doubles to 35 [mtpa] over the next three years,” stated the report authored by Paul McConnell, principal analyst of global markets for Wood Mackenzie.

Pushing forward

LNG talk has dominated conversation in Australia, but other types of developments also are moving forward.

Origin Energy is making headway toward extending the production life of the Yolla Field, having successfully lifted the export compression and condensate pumping modules into place on the Yolla offshore platform late last year.

The company announced in December that its Speculant-1 exploration well had found potentially commercial amounts of gas in Waarre Formation reservoirs. Described as a tilted fault block structure covering more than 7 sq km (3 sq miles), the discovery is located in the Otway Basin offshore Victoria.

Beach Energy and Drillsearch continue to progress in the Cooper and Eromanga basins, with results of the last of a six-well oil development campaign in the Bauer Field exceeding expectations.

“Bauer‐18 intersected the target top Namur Sandstone 0.7 m [2.3 ft] high to prognosis, with 6.6 m [22 ft] of net oil pay. An additional 4.2-m [13.8-ft] oil-bearing gross interval of overlying McKinlay member was also intersected,” Beach Energy said in a news release.

Hopes are for all six of the recently drilled Bauer development wells to be online in third-quarter 2015.

Strides also continue to be made at the Woodside-operated North West Shelf JV project, which provides oil and gas from offshore fields in the Carnarvon Basin. The development’s Greater Western Flank Phase 1 project is due for startup in early 2016. The project will develop the Goodwyn GH and Tidepole fields via a subsea tieback to the Goodwyn A platform, according to Woodside’s website.

And discoveries keep coming. Among the latest is Yarowinnie South-1 well’s wet gas find in the Cooper Basin (Drillsearch Energy Ltd., 40%, and Santos, 60% and operator). Preliminary interpretation of wireline logs confirmed an aggregate best estimate of almost 15 m (49 ft) of net gas pay over several intervals in the Patchawarra Formation totaling a gross Patchawarra interval of 410 m (1,345 ft), according to Drillsearch.

Additional E&P opportunities exist.

“Australia does have several frontier areas, with the most notable being the Bight Basin offshore South Australia,” Gatdula said. “Expect these areas to receive significant exploration budgets as limited geologic details and deepwater nature would mandate. Specifically, BP has committed to building a heliport to serve operations in the basin, with exploration drilling expected to take place by 2016.”

But like other parts of the world, Australia faces competition for limited capital. “Australia’s main tool to stimulate investments is the same for all countries, which is a favorable fiscal and regulatory environment,” Gatdula added. “Australia is competing for a diminishing pool of investment dollars with other countries that are offering tax discounts and incentives. These mechanisms reduce the risk for investors and increase the profitability of projects, both of which present favorable opportunities for investment.”

Contact the author, Velda Addison, at vaddison@hartenergy.com.