With US shale looming, gas rivals play nice

The Santos-led GLNG and BG Group’s QGC coal seam gas-fed export LNG projects in Queensland today struck a deal that represents a significant development in the evolution of the three big plants being built at Gladstone.

Ever since it became evident that three discrete projects would be built on Curtis Island at a cost of around $60 billion there have been calls for the rival consortia to cooperate to lower the escalating costs of the projects.

The logic of cooperation has become even more compelling as the US shale gas revolution has raised the prospect of US gas being liquefied and exported into Asia at Henry Hub-based prices, under-cutting the Australian suppliers.

In theory US shale gas could be landed in Asia (after liquefaction, transport and re-gasification costs) and sold for around $US12-13 per mBTU compared with the $US15-16 per mBTU Australian conventional LNG attracts. While US-sourced LNG supplies are likely to be a relatively small part of the Asian market, they could materially impact LNG prices, making it imperative that new Australian producers have the lowest capital and operating costs possible.

The agreement the Santos GLNG venture (Santos, Petronas, Total and Kogas) signed with the BG-owned QGC isn’t the kind of comprehensive infrastructure-sharing some have been calling for but it is the first significant cooperative arrangement struck between the projects.

The two projects have agreed to connect their plants by building two interconnections between their major pipelines, allowing them to flow gas in either direction between the projects.

The connections will enable them to cope better with plant downtime, planned or otherwise, and disruptions to their gas fields. Given the recent history of Queensland’s weather, that is useful insurance.

As the companies said, it will allow them to buy, sell or swap gas at the interconnections in future, maximising their plants’ productivity and creating optionality if they are either "long" or "short" of supply of gas to their plants.

QGC is also reportedly talking to Origin Energy’s APLNG consortium (Origin, ConocoPhillips and Sinopec) about similar arrangements. If that deal could be done, in effect all three of the LNG plants would be interconnected and all three operators could flow gas between them.

Origin, which has always claimed the largest coal seam gas reserves in Queensland, has already committed to supply gas to both the other projects.

All three consortia are building two-train projects but are considering adding at least another train because the economics of adding processing capacity to the base infrastructure are compelling. 

There is a question-mark over whether there are sufficient gas resources required to support more than six trains and a bigger one over whether the resources are perfectly aligned with the ownership of the individual projects.

Those doubts will be exacerbated if Shell and PetroChina go ahead with plans to build a fourth plant on Curtis Island, although they could use their gas resources as currency or leverage to join one of the existing projects.

The Origin supply deals and the flexibility demonstrated by today’s agreement to shift gas between projects creates the prospect that cooperation between the plants could help ensure that they all operate at their capacity and as efficiently as practicable.

Given that their major competition isn’t from the co-located projects but from US and other shale gas producers, that’s a desirable objective.