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Financial Times: Exports overlook domestic needs

By Raphael Minder
Published: December 5 2006 02:00 | Last updated: December 5 2006 02:00

In July, China received its first supplies of Australian LNG. The long-term contract, valued at about A$25bn, is the single largest export deal struck in Australian history.

Even though some experts raised concerns that Australia had locked into acontract that set too low a price for its future gas shipments, the agreement with Beijing was hailed as a significant step towards cementing China’s reliance on Australia as an energy supplier.

It also underlined the extent to which Australia is taking a leading role in the growing market for LNG. Ian Macfarlane, the Australian industry minister, recently suggested that the market could be worth A$60bn to Australian gas producers.

Several companies are set to benefit from Australia’s LNG push, but arguably none more so than Australia’s biggest energy company, Woodside Petroleum. In fact, Woodside has set itself the ambitious target of becoming the world’s largest supplier of LNG by 2015, ahead of Shell and ExxonMobil.

At a presentation in November, Reinhardt Matisons, Woodside’s director in charge of LNG and oil marketing, forecast that world demand for LNG would double over the coming decade, with Asian demand far outstripping supply. “On the supply side, if anything, the region is going backwards,” he said. The company is also hoping to develop its LNG trading activities, potentially holding back reserves to tap into higher prices in regions such as Europe or the US at any time.

LNG and domestic pipeline gas accounted for 36 per cent of Woodside’s US$2.06bn of revenues in 2005. However, several projects are due to come online during the coming years, ensuring that LNG will eventually become the main contributor to group revenues. That is particularly good news for Woodside at a time when it has hit some problems in its oil business. It has faced drilling difficulties at Enfield, its largest oil project in Western Australia while another important oil project, Chinguetti in Mauritania, has proved much more complex than foreseen.

The most promising LNG project for Woodside is arguably Pluto, which is off the northwestern coast of Australia and is fully-owned by Woodside, unlike the company’s other major gas projects. It is scheduled to require between A$6bn and A$10bn of capital expenditure to develop but the current timetable – from discovery in 2005 to the first delivery to customers before the end of 2010 – would make it the fastest ever LNG project in terms of development. Browse, which is another significant Australian project that is 50 per cent owned by Woodside, is due to start between 2012 and 2014.

Adding Pluto and Browse would also considerably boost Woodside’s clout as a pricing negotiator in what is still a nascent LNG trading market. Executives in the gas sector such as Mr Matisons have recently stressed that the bargaining advantage is clearly switching towards sellers, as demand for energy continues to outstrip supply, particularly in Asia.

However, both Browse and Pluto still require a final investment decision to proceed. Paul Moore, a director of Woodside, says: “Browse is truly a mega project. As such it will face some challenges. We believe Browse has similar gas reserves to what is left on the Northwest Shelf. It should be hot on the heels of Pluto.”

The bright prospects for Woodside and the other companies involved in LNG production off the coast of Western Australia, where the bulk of Australia’s gas deposits lie, have however caused some domestic friction.

While companies such as Woodside are clearly hoping to export their LNG to Asia and possibly the west coast of the US, Australian industrial companies are worrying that too little gas is being made available for their own needs. That is particularly true of resources companies, which have benefited from the surge in commodities prices but want to have access to more gas in order to power and extend their installations, such as the giant kilns used to transform deposits extracted from the ground into metals.

As a result, the state government of Western Australia, recently put out a policy paper stating that Australian gas suppliers operating in the state should set aside 15 per cent of theirproduction for domestic usage. That is a worrying prospect for Woodside and others, especially in terms of assessing the future export potential of projects such as Pluto.

“We’re in negotiations over exactly how that policy applies to that Pluto project and we’re working out how to meet the different goals,” says a Woodside spokesman. “The industry initially put in a submission arguing that the issue of supplying the domestic market was best left to the market. We support that view. But the government has made it clear that it has a policy, so we are now working to meet the policy.”

Some companies are sympathetic to the arguments of the gas producers and fearful about state interventionism and a tighter regulatory environment, which could ultimately harm their own growth plans.

Gary Comb, managing director of Jabiru Metals, a junior mining company, suggests the solution could be to organise a tender system, whereby domestic companies would get priority if they can match the average price of the best export offers, rather than forcefully demanding that gas companies set aside part of their production for the domestic market.

“It’s certainly not easy for everybody to get access to the gas they need right now,” he says.

“But just guaranteeing that 15 per cent of the production be set aside seems to be a big hit on the producers because, after all, a lot of effort and money goes into developing those gas projects.”

Copyright The Financial Times Limited 2006

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