Origin keeps its 'enemies' close

Origin Energy's supply deal with the GLNG consortium, which includes two of its rivals, highlights the way international gas prices are steadily being imported into the domestic market. But it's a phenomenon that will be short-lived.

The 10-year deal Origin Energy has signed to supply gas to a rival export LNG project demonstrates the strength and value of the strategic position Origin has built through its development and acquisitions of eastern seaboard gas resources.

Origin has committed to supplying the GLNG consortium 365 petajoules of gas – 100 terajoules day – from 2015. The GLNG consortium of Santos, Petronas, Total and Kogas is building a $US16 billion two-train export LNG plant at Gladstone in Queensland which aims to produce 7.8 mtpa of LNG from 2015.

In 2010 Origin negotiated a 20-year deal with BG Group, which is also building a two-train gas liquefaction plant at Gladstone, targeting first production in 2014. Origin agreed to a 20-year deal to sell 190 petajoules of gas within jointly-owned fields to BG.

Origin itself, of course, is part of the APLNG consortium with ConocoPhillips and Sinopec which has committed to the first train of their own Gladstone LNG plant and which plans to make a decision on a second train by the middle of this year. If the second train gains financial investment decision approval it will be a $US20 billion project. It is also targeting mid-2015 for first gas from the plant.

So, Origin is not only sourcing the coal seam gas for its own joint venture but for two of its rivals. The only Queensland LNG player it hasn’t agreed to supply, yet, is the Shell/PetroChina partnership.

Origin has always claimed the biggest and best coal seam gas reserves/resource position in Queensland, while the market has had some reservations about whether some of its rivals had sufficient resources to support their projects.

Origin’s Grant King, however, has previously said that he believed there was enough gas to supply five or six LNG trains at Gladstone but that the resources weren’t necessarily perfectly aligned with the joint ventures and might have to be shared on a commercial basis to ensure the trains were kept full.

King has also referred to the optionality Origin has in exploiting its resources and its ability to use it in its own power generation business or to trade it, which is, in effect, what’s happening. Origin owns or has control of a bigger resource than its plant needs so it is selling some of the excess to its competitors.

The attractive aspect of selling it to rival LNG producers is that it gives Origin access to international gas prices, which are linked to the oil price, rather than domestic gas prices which can be 50 per cent lower. It also allows the resources to be monetised earlier than if they were used to support Origin’s domestic activities.

Origin has a range of owned and contracted gas that it can use to support its highly integrated domestic energy business, as well as prospective new developments. It has, however, also negotiated an option with GLNG to call back 1.825 petajoules of gas during periods of high east coast energy demand to add to its sourcing flexibility.

The contract with GLNG is another illustration of the way in which international gas prices are steadily being imported into the domestic market as producers now have a major arbitrage to exploit.

That arbitrage will progressively be closed via higher domestic gas prices, which in turn will increase the value of gas reserves and lead to more gas resources being commercially viable, but will (with the carbon tax and heavy energy infrastructure investment) be another factor forcing energy prices up.


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