Australia’s $54 Billion Gas Project Starts Shipping

Doubts are being cast as to the viability of Australia’s massive $54-billion Gorgon gas project—the most

expensive in the world—as first cargoes are set to sail at a time when the global energy market is

battling sliding prices and a sharp decline in demand conditions.

But Australia, and the project’s partners, remain optimistic, banking on expert opinion that liquefied

natural gas (LNG) prices aren’t going to remain low forever, and on growing demand from the Asia

Pacific region, which would work in the project’s favor.

The Gorgon Project is being constructed on Barrow Island, located around 60 kilometers off the

northwest coast of Western Australia. The project is a joint venture between the Australian subsidiaries

of Chevron (47.3 percent), ExxonMobil (25 percent), Shell (25 percent), Osaka Gas (1.25 percent), Tokyo

Gas (1 percent) and Chubu Electric Power (0.417 percent).

The giant 15.6 million-tons-per-year project has now launched production, with gas running through the

first train on Barrow Island, and an LNG tanker prepared to set sail with the first cargo. The first and

third cargoes will reportedly go to Chevron, while the second and fourth will go to partners Exxon and

Shell, respectively.

But Chevron will be selling into a ‘’lousy’’ market.

Not only are crude oil prices pushing LNG down, but record new gas supplies from both Australia and

the U.S. are undercutting Gorgon’s potential and rendering pricing below production costs.

In early February Chevron lowered its prices after one-quarter of its share of a decade in volume

remained unsold.

Since December, Chevron Corp has signed two preliminary deals to sell LNG to Chinese customers, ENN

and Huadian Green Energy Co. These are ten-year deals, with the first starting in 2019 and the second in

2020. And the prices are believed to be around 12.2 percent of crude oil, in addition to a small fixed fee

and a floor price, according to Australia’s Financial Review.

But it’s the Japanese customers that Chevron really wants, and it already has five long-term buyers who

are locked in for 25 years at 14.85 percent of the crude oil price.

Spot market price woes aside, there may be a reason to be bullish in Gorgon.

This is, after all, a long-term game, and from this perspective, the fundamentals remain attractive. With

an anticipated lifespan of four decades, there is significant shareholder value to be found.

Though the International Energy Agency (IEA) has recently suggested the LNG industry would struggle to

break even over the next few years, over the long run, low prices and growing Asian demand will work in

Australia’s favor, according to BP group chief economist Spencer Dale.

“There’s a surplus of energy for a while and prices will reflect that. But the long-run economics I think

look pretty good,” the International Business Times quoted Dale as saying.

BP predicts that gas will become the fastest growing fuel source, and Australia is expected to become

the world’s top LNG exporter by next year, overtaking Qatar.

All told, Australia has more than $180 billion in LNG gas export projects coming online soon. By next

year, Australia is expected to add some 53 million tons of LNG production per year to its roster.

Over the next two to three years, Australia will see some extremely ambitious gas projects come online.

Gorgon is just one, and Chevron’s Wheatstone LNG project is also slated to start production mid-next

year. Also in the works are the Gladstone LNG project run by Santos and the Australia Pacific LNG plant

under construction by Origin Energy and Conoco Phillips.

Australia is all about LNG, and has never shied away from major projects regardless of the prevailing

price picture. The prevailing sentiment is that the buyers will come.

NGS INDIA