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John Daly

John Daly

Dr. John C.K. Daly is the chief analyst for Oilprice.com, Dr. Daly received his Ph.D. in 1986 from the School of Slavonic and East European…

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Australia Looks to Raise LNG Production by Nearly 30 Percent

The international energy trade in hydrocarbons is the world’s largest fungible commodity, worth trillions of dollars. While the global oil trade still dominates world markets, natural gas is rising fast, stimulated by rising U.S. production. The influential U.S. based Council on Foreign Relations reports, “The world produced and consumed more than 100 trillion cubic feet of natural gas in 2009, representing more than 20 percent of global energy production. About one-third of gas is exported and the rest consumed by the producing countries themselves. North America, Europe, and Eurasia comprise about two-thirds of all natural gas consumption. Current projections suggest global consumption as a whole will rise to 156 trillion cubic feet by 2035. Many of the increases in consumption come from Asia, and increases in natural gas exports come from Middle East LNG. Unlike oil, natural gas production is not dominated by the places with the most natural gas reserves. Iran and Qatar have the second and third largest reserves after Russia, but both provide only a small fraction of the world's total production. In 2009, both Qatar and Iran represented about 4 percent of global production, according to the U.S. Energy Information Administration (EIA). The United States is the world's largest producer but represents only a small fraction of global reserves.”

With such riches at stake, many nations are racing to expand their LNG production to sell to East Asia’s voracious markets – China, Japan and South Korea, none more so than Australia, which has the advantage over Russia, Iran and Qatar of greatly reduced shipping costs.

Related article: Chevron Lands Million-Ton LNG Futures Buy in Australia

And the crown jewel is the long-stalled development of the Sunrise natural gas project that straddles the Australian-Timor-Leste maritime border.

The issue of markets is a dead certainty. Japan and South Korea account for nearly 60 percent of LNG global imports, and experts note that the two nations will remain the dominant consumers of LNG for the foreseeable future, with Japanese interest in LNG ramping up in the wake of the disastrous 11 March 2011 Fukushima nuclear crisis.

So, what’s the holdup in bringing Sunrise LNG to Asian consumers? Development of the project has been stymied since East Timor (now Timor-Leste) gained its independence from Indonesia a decade ago in 2002 due to its demand the gas be piped to Timor-Leste for processing and transshipment, to maximize the country's economic benefit from the project.

Hardly surprising that Timor-Leste is baulking. The reserves of the Sunrise offshore fields are estimated at eight trillion cubic feet of gas and 300 million barrels of condensate, which could generate $40 billion in royalties over the fields’ projected lifetime of 30 years.

In June 2005, Timor-Leste’s National Parliament unanimously approved the creation of a Petroleum Fund to serve as a repository for all petroleum revenues and to preserve the value of Timor-Leste's petroleum wealth for future generations.

So, why is Timor-Leste being difficult?

Consider – the CIA estimates that Timor-Leste’s annual GDP is a mere $4.214 billion, as opposed to Australia’s $1.542 trillion.

Small wonder then, as to why Timor-Leste is concerned about more equitable revenue sharing.
Simply put, Timor-Leste wants onshore natural gas processing from the Sunrise fields to create “value added” product, while Australian partners are pushing for maritime LNG processing. Given that the bulk of the revenue for developing Sunrise comes from foreign investment, Timor-Leste’s negotiating position is weaker than it might be, because it cannot begin production with its own indigenous resources. And so, the negotiating waltz continues.

Related article: Investing in Natural Gas Companies Despite the Low Gas Prices

Adding to Timor-Leste’s suspicions of being both pressured and ripped off over the development of Sunrise, in July 2012 Timor-Leste’s Secretary of State Agio Pereira announced that it was urging Australia to audit the foreign companies involved in joint ventures in developing the Sunrise fields in Timor-Leste’s Joint Petroleum Development Authority’s Timor Sea district that is jointly owned by Australia and Timor-Leste. Pereira told journalists that there were multiple companies under investigation for ''possibly billions'' worth of tax discrepancies, stating that ''After audits by the relevant authorities in Timor-Leste, 28 assessments have been made against oil companies.'' Besides Australia’s Woodside Petroleum, Royal Dutch Shell, Inpex, Italian company Eni and U.S. oil giant ConocoPhillips head the list of oil companies being investigated.

No guesses as to who might come out on top in the investigations. As Michael Corleone famously observed, “It’s just business.” With reported revenues of $467 billion in 2012, Royal Dutch Shell is Europe's largest energy company, while ConocoPhillips’s 2012 revenue was $57.967 billion.

Against such fiscal steamrollers, Timor-Leste’s annual GDP of $4.214 billion seems a tad paltry, and the country’s Joint Petroleum Development Authority could face a long, bruising and expensive legal fight, however much it believe right is on its side.

Just business.

By. John C.K. Daly of Oilprice.com

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