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). Related: Why Oil Booms And Busts Happen
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. Related: The Allure Of Shale Is Wearing Off
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. Related: Oil Giant Cuts Budget By 80 Percent And Suspends Fracking
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.
By Charles Kennedy for Oilprice.com
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