3 Reasons To Consider Investing In Australian LNG Projects

 |  Includes: BP, COP, CVX, RDS.A, RDS.B
by: E.I. Solutions

With the abundance of shale gas fields in the U.S., availability of natural gas increased exponentially since the last decade. As a matter of fact, according to the U.S. Geological Survey's assessment of 2012, the mean estimated volumes of natural gas were approximately 32 billion barrels of crude oil, 291 trillion cubic feet of natural gas, and 10 billion barrels of natural gas liquids.

However, other countries are extensively exploring for new sources of energy. For example, take Australia. Notable producers are currently producing from an abundant resource of shale gas in this country. The first LNG project that started more than a decade ago, is still producing at about 16.3 Mtpa since 1989. The North West Shelf Venture developed by Chevron (NYSE:CVX), Royal Dutch Shell (RDS.A, RDS.B), BP (NYSE:BP), Woodside, BHP Billiton (NYSE:BHP) and Japan Australia LNG (Mitsubishi and Mitsui owned) cost about $50 billion in 2012 dollars.

Three reasons can be identified in order to seize the opportunity that Australia is offering:

  1. Tremendous potential of Australian reserve
  2. Solid and renown players involved
  3. The geographical factor

Tremendous Potential Of Australian Reserve

Australia is currently the fourth largest natural gas producer in the world with about 819 Tcf (trillion cubic feet) of gas reserves. Notably, exports of natural gas in 2012 totaled about 21 million tonnes while oil and gas production accounted for $29.4 billion in economic benefits, which represented 2% of Australia's GDP according to the APPEA (Australian Petroleum Production & Exploration Association).

Notably, the Australian energy industry has estimated that natural gas exports could account for $65 billion, representing no less than 3.5% of Australia's GDP by 2020. These exports could amount to about 85 million tonnes of LNG, making Australia the leading producer of natural gas worldwide in about six to seven years.

Several LNG ventures are under way in the country and some renown producers are well positioned to get the most of what Australia's tremendous potential has to offer.

Solid and Renown Players Involved

Located about 37 miles off the northwest coast of Western Australia, on Borrow Island, the Gorgon project will include three processing trains for total capacity of 15.6 Mtpa. Notably, the joint-venture will be operated by Chevron, in which it owns 47.3% working interest while five other partners are being part of the venture, including Shell at 25% and ExxonMobil, with 25% working interest as well.

The Gorgon project has been estimated to hold about 40 Tcf of natural gas originally in-place, a quite large deposit that is expected to last at least 60 years. With an initial budget of about $52 billion to develop the project, Chevron Vice Chairman George Kirkland announced on December 11, 2013, that the project would cost Chevron an additional two billion dollars. Kirkland stated:

In Australia, the Gorgon project has been under construction for four years and is almost 75% complete. The current estimate for the cost of the foundation project is $54 billion, with plant startup and first gas planned for mid-2015.

Kirkland added:

Gorgon project economics are attractive. We continue to make steady progress against key project milestones and are applying lessons learned to our Wheatstone development which is almost 25% complete.

Kirkland is referring to the second and last project in which Chevron is participating in Australia. Wheatstone LNG in under construction and is designed to process a total capacity of 8.9 Mtpa of natural gas. Chevron as the operator, owns 64.14% working interest in Wheatstone, a joint-venture with five other partners including Apache with a 13% stake and Shell with 6.4%.

The $28 billion-budgeted Wheatstone project is located at Ashburton North Strategic Industrial Area, which is about 7.5 miles west of Onslow, in Western Australia's Pilbara region. The commissioning has been targeted for mid-2016.

Gorgon and Wheatstone will be LNG cornerstones in the Asia-Pacific region:

Approximately 75% of our combined LNG offtake from the two projects is committed under firm, long-term sales and purchase agreements. These LNG developments are two of our most important future legacy assets, representing approximately 400,000 Bbls/d of net production at full capacity. They will be substantial contributors to our cash flow for decades to come.

said Kirkland to conclude its speech.

In 1995, ConocoPhillips (NYSE:COP) discovered the Bayu-Undan Field in the Timor Sea, a field located at about 310 miles northwest of Darwin, Australia. The deposit was estimated to hold reserves of about 3.4 Tcf of gas and 400 Mmbbls of condensate. ConocoPhillips developed Darwin LNG, a joint-venture including five other partners and built a 3.7 Mtpa capacity project that was commissioned in 2006.

Another project that is being developed is Australia Pacific LNG. Scheduled for 2015, ConocoPhillips owns 37.5% working interest in this joint-venture, Sinopec and Origin Energy owning the remaining interest. With a budget of $24.7 billion, the joint-venture planned to build two processing trains for a total capacity of 9 Mtpa of LNG. Australia Pacific LNG is located in southwest and central Queensland and an LNG facility is currently being constructed on Curtis Island, off the coast of Gladstone.

Finally, this article wouldn't be complete without discussing Shell's innovation with the development of Prelude FLNG, the world's first floating liquefied natural gas project, in which it owns 67.5% working interest. Three other partners including Inpex and Kogas are participating in the venture that will be designed to produce about 5.3 Mtpa of liquids, containing about 3.6 Mtpa of LNG and 1.3 Mtpa of condensate.

To give you an idea of its magnitude, Prelude facility's storage tanks will have the capacity of 175 Olympic-sized swimming pools and the deck will even be longer than 4 soccer fields laid end to end. The chosen site for Prelude is located at approximately 300 miles northeast of Broome, in Western Australia. The project, estimated at about $13 billion for its development, is scheduled for ramp-up in 2017.

The Geographical Factor

Australia is perfectly located to reach the most lucrative markets. As a matter of fact, being close will allow the producers to reduce shipping costs, which means that more profit will be generated out of its production activities.

The proximity of emerging markets such as China and India is a definite catalyst to maximize profit. These developing countries are in dire need for cheap energy sources to sustain their growth, and at four to five times the U.S. price, natural gas is the cheapest source of all. Other substantial consumers include Japan and South Korea.

Bottom Line

With about 819 Tcf of natural gas in total reserve, Australia's potential is tremendous. Furthermore, great major producers with several years of expertise in offshore drilling are making the most of the opportunity since Australia's government authorized its abundant resource's development.

To the contrary of U.S. endless approval regulations to authorize the construction of export terminals, Australian rules aren't as complex, even if some could be improved. Finally, its ideal geographic location allows the producers involved, a clear edge over the competition. Therefore, investing in Australian LNG projects involving proven and reliable producers makes a lot of sense.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.