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Financial Times: Australia set to enjoy boom in LNG exports

By Virginia Marsh

Published: June 21 2006 03:00 | Last updated: June 21 2006 03:00

Australia’s liquefied natural gas industry is on the brink of a A$50bn (US$37bn) investment boom that is set to make it the world’s third-largest LNG exporter within five years, in spite of the recent setback for Chevron’s Gorgon project.

For Woodside Petroleum, the pioneer of the local LNG sector, the planned investments mean it could overtake BP in the next decade to become the world’s biggest non-government owned LNG operator after Shell.

For years, most of the huge stranded gas reserves clustered off Australia’s northern and western coastlines were considered the poor relations of the country’s coal-dominated energy sector. Energy users were not prepared to commit to the long-term purchase agreements needed to underpin their development, a far more capital intensive exercise than oil production.

But rising global oil prices, the environmental benefits of gas, energy security issues, technical advances and strong economic growth in the Asia-Pacific region have produced a marked change in the outlook.

“There is a massive acceleration in the development of the industry,” says Diane Brookman, an analyst at Citigroup in Sydney. “A paradigm shift is occurring. Since last year it has been a seller’s market for the first time since the 1980s.”

Chevron’s A$11bn Gorgon development is one of up to three large new projects due to begin production off western Australia early in the next decade.

Australia has just two operating LNG projects – the world-scale North West Shelf that began production in 1989 and the smaller Bayu Undan project, off Darwin, operated by ConocoPhillips.

Although Gorgon wassent back to the drawing board on environmental concerns, analysts believea compromise will be found.

The greater Gorgon area, which comprises several fields, has estimated reserves in excess of 40,000bn cubic feet. The venture – in which Chevron has 50 per cent, and ExxonMobil and Shell each have 25 per cent – hopes to build a 10m-tonnes-a-year processing plant that at its peak would produce about one-third of Australia’s LNG exports.

“It is hard to see Chevron walking away from such a big project,” says Aiden Bradley, an analyst at ABN Amro in Sydney. “We would see [recent difficulties] as a one-off. Gorgon is the most environmentally sensitive of the big LNG projects being planned in Australia.”

At the company level, however, Woodside Petroleum, Australia’s biggest independent oil and gas producer, looks set to be the biggest beneficiary of the local LNG boom.

It is the operator of the North West Shelf, the country’s biggest resources project that following a landmark A$25bn contract with China is undergoing an A$2bn expansion that will lift its annual capacity by 4.4m tonnes to 16.3m tonnes by late 2008.

It also has three other large LNG projects – Pluto, Browse and Sunrise – set for development in the next five to eight years.

These are set to lift Woodside’s operated LNG capacity from nearly 12m tonnes a year to about 23m tonnes a year by 2010 and to 45m tonnes a year by 2015, only 7m tonnes behind Shell, says Don Voelte, Woodside’s chief executive.

The development pipeline, together with high oil prices, has lifted Woodside’s share price to more than A$40, up from the A$14.20 that Shell, its largest shareholder with 34 per cent, was prepared to pay in 2001 before its hostile offer was blocked by the Australian government on national interest grounds.

The projects are needed to fulfil what is expected to be a doubling in global demand for LNG to 280m tonnes a year by 2010, with much of the new business coming from Asia, which already accounts for about two-thirds of traded LNG.

Demand within the region is expected to surge 40 per cent to 138m tonnes a year by 2010, according to Wood Mackenzie, and by a further 43 per cent to 197m by 2015.

Australia supplies about 10 per cent of Asian LNG, but the government has set a target market share of about 30 per cent.

The improved markets are also leading to greater exploration in Australia, which, according to the Australian Petroleum Production and Exploration Association, is under-explored and has “significant untapped potential, both onshore and offshore”.

Copyright The Financial Times Limited 2006

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