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Lloyds List: Major players set the ball rolling

Tony Gray, Lloyds List
Published: Sep 21, 2007

A BURST of activity has seen liquefied natural gas return to the front pages.

After a year-long quiet spell, during which rising construction costs seemed to ensure little progress was made in advancing projects, there has been a rapid flow of positive news in the past two months.

Russia’s natural gas monopoly Gazprom started the ball rolling inmid-July by finally choosing France’s Total as a partner in developing thegiant Shtokman offshore field, whose reserves will partly support a major LNG project.

Two weeks later, Australia’s Woodside Petroleum gave the go-ahead for the A$12bn ($9.5bn) Pluto LNG project, which will require the construction of at least three new vessels.

Next, the Angola LNG project moved forward by signing a letter of intent with a consortium comprising Teekay and Japanese companies Mitsui & Co and NYK to supply four 160,400 cu m LNG vessels.

And, in the past few weeks, it has been Australia as supplier and China as buyer which has dominated the news.

First, PetroChina gave a boost to the troubled Gorgon project by concluding a binding heads of agreement with Shell covering the supply of 1m tonnes of LNG a year over 20 years.

Then, the Chinese company became the foundation partner for Woodside’s Browse development with a key terms agreement involving the potential sale of 2m-3m tonnes a year for a period of 15-20 years.

Good news for shipbuilders and shipowners but they should not get too excited just yet.

Final investment decisions have still to be taken on the Shtokman, Gorgon, and Browse projects which are not likely to start production for another six to nine years.

Moreover, it has not been good newsall the way: Algeria has just unceremoniously dumped Spain’s Repsol and Gas Natural from the Gassi Touil development, placing a question mark over the Arzew LNG export project for which a final investment decision was expected this year.

Even so the return of China to theLNG market, after a long spell on thesidelines as energy prices rose, is being seen as particularly significant for two reasons.

Firstly, it is understood that PetroChina has agreed to pay market-related prices rather than the fixed levels it has traditionally sought in long-term deals.

In 2005, for example, Chevron scrapped a tentative agreement for ChinaNational Offshore Oil Corp (CNOOC) to become a foundation customer forgas from the Gorgon project because the price the Chinese were willing to pay was too low.

But this year China has been buying spot cargoes of LNG at prices thathave been more than double thoseunder its contract with the Woodside-operated North West Shelf venture inAustralia.

Secondly, the fact that China has chosen to conclude deals with Australia could have negative implications for the ambitions of other energy suppliers, notably Iran.

Through the Woodside-operatedNorth West Shelf project, politically stable Australia has proven to be a reliable source of LNG for almost 20 years and CNOOC has been a customer since 2002.

CNOOC is keen to secure more LNG from Australia.

‘We are very interested to get more LNG from Australia,’ says Fu Chengyu,the group’s chief executive, earlier this month.

Australia is not only viewed as beinga very low-risk source for commodities, including iron ore, but has theadvantage of a relatively short shipping distance to China and other east Asian importers.

The same cannot be said for Iran, which has ambitions to emulate Qatar’s ascension in the LNG industry.

Interestingly, PetroChina has a 25-year accord to buy 3m tonnes a year of LNG from Iran, theoretically starting in 2011. Iran has a number of LNG projects in the pipeline but they are all progressing slowly and PetroChina’s decision to buy LNG from Woodside could indicate that China has lost patience with Tehran over supplies.

This view tends to be supported by reports that the Browse LNG is destined for PetroChina’s planned Rudong import terminal in the eastern province of Jiangsu.

When the Rudong terminal was approved earlier this year, it was saidofficially that the LNG would be sourced from the Middle East and unofficially that the aim was to bring in most of it from Iran.

Given the slow progress in Iran, Australian gas must look attractive, especially as its LNG exports do not have to transit potential choke points of the Straits of Hormuz in the Middle East Gulf, and the Malacca Strait.

If Iran’s ambitions to be the next major force in the LNG industry look to be as remote as ever, the Qatar juggernaut continues to roll on.

In August, Qatar Gas Transport Co (Nakilat) reached another milestone, with the keel-laying ceremony for the first of the giant Q-Max vessels.

When the 266,000 cu m vessel is delivered by South Korea’s Samsung Heavy Industries next August, it will be the largest LNG carrier in service.

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