INFRASTRUCTURE KEY FOR AUSTRALIAN LNG PROJECTS

UNCLAS SECTION 01 OF 06 PERTH 000040

SENSITIVE
SIPDIS

STATE FOR EEB MONOSSON
DOE FOR JEFF SKEER
USDOC FOR 3132/USFCS/OIO/EAP/JRULAND
USDOC FOR 4530/MAC/EAP/OPB/GPAINE

E.O. 12958: N/A
TAGS: ENRG EINV EPET AS
SUBJECT: INFRASTRUCTURE KEY FOR AUSTRALIAN LNG PROJECTS

REF: A. A. CANBERRA 758

B. B. PERTH 38

C. C. PERTH 39

D. D. CANBERRA 630

E. E. PERTH 36

F. F. CANBERRA 724

G. G. 2008 CANBERRA 1279

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THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.




1. (U) SUMMARY: Australia's conventional liquefied natural gas
(LNG) industry is set to take a significant step forward over
the next 18 months when a third LNG project, Woodside's Pluto,
becomes operational and the massive Gorgon Gas project in
Western Australia (WA) receives the widely-anticipated go ahead.
Infrastructure will be a key factor for the slate of other LNG
projects seeking to exploit Northwest Australia's large,
off-shore natural gas reserves. There are likely to be fewer
stand-alone LNG processing plants, especially in the Kimberley,
and more third-party supply arrangements, long-distance
pipelines, and floating LNG facilities. The Australian Federal
government's possible new, tougher "use it or lose it" policy
toward exploration leases, and pressure from environmental
concerns, are also likely to favor consolidation of LNG
infrastructure. Conventional LNG, unlike rival coal seam
projects in the east, will receive some benefits from
Australia's proposed emissions trading scheme. End Summary.



Massive Gas Reserves, But Remote




2. (U) The vast majority of Australia's estimated 150 trillion
cubic feet (tcf) of conventional natural gas reserves are
located in the country's remote northwest region off the Western
Australian and Northern Territory (NT) coastline. Until
recently, only a handful of known reserves have been
commercialized because of deep water, lack of markets, and
minimal infrastructure in the region's small, remote coastal
towns. With global demand for LNG expected to increase rapidly
over the next two decades, and technological advances in
deep-water exploration and production, the Australian LNG sector
represents a major growth opportunity (Ref A).



Two operating LNG plants: Northwest Shelf and Darwin




3. (U) Australia has two producing LNG plants, the Northwest
Shelf Joint Venture (NWSJV) in WA, and Darwin LNG in NT. The
NWSJV began operating in 1989, underpinned by long-term supply
contracts to Japanese utility companies, and a domestic gas
pipeline financed by the WA state government. The venture
currently produces 16.3 million tons per year (mtpa),and has
shipped over 2700 LNG cargoes, mainly to Japan, South Korea and,
recently, China. Woodside Energy operates the facility, and is
one of six equal partners (see Table 1). ConocoPhillips' Darwin
LNG began shipments in 2006, and currently produces 4.3 mtpa,
again mainly for Japanese utility customers.



Slate of LNG Projects




4. (U) At least ten other conventional LNG projects worth an
estimated A$187.5 billion (US$150 billion) are underway or under
consideration in Northwest Australia (see Table 2). Woodside
Energy, Australia's largest independent energy producer, expects
global LNG consumption to grow by seven percent a year through

2020. The company has fast-tracked construction of its

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90-percent-owned A$12 billion (US$9.6 billion) Pluto project,
soon to be Australia's third operating LNG facility when it
begins producing 3 - 4 mtpa in early 2011. Woodside maintains
that the Pluto site -- located literally across the road from
the NWSJV with good access to port and other infrastructure --
can be expanded to accommodate up to five processing units
(trains),and is therefore ideally suited to be the centerpiece
of a Pilbara LNG infrastructure hub. With insufficient gas
reserves as yet, Woodside has been in discussion with third
parties in the region such as Apache and Hess to supply gas for
Pluto's expansion.



Gorgon Gas Likely Fourth LNG Plant




5. (SBU) The massive A$50 billion (US$40 billion) Chevron-led
Gorgon Gas Project in WA is poised to be Australia's fourth
operating LNG project. Partners Chevron (50 percent),Shell and
ExxonMobil (25 percent each) plan to construct a 15-mtpa
three-train plant on protected nature reserve Barrow Island, 60
kilometers off the WA Pilbara coast. The project will undertake
the world's largest carbon sequestration effort, injecting
excess CO2 from the gas into an underground aquifer on the
island. In later stages, Gorgon will supply natural gas to the
domestic market via a pipeline to the mainland. The project is
underpinned by plentiful gas supplies (40 tcf, a quarter of
Australia's known gas reserves),and off-take agreements are in
place with Japanese utilities, India's Petronet and, most
recently, ExxonMobil's A$50 billion (US$40 billion) 30-year
agreement to supply PetroChina (Ref B). Despite massive gas
supplies, project officials told us during a visit to the island
in April, expanding the Gorgon facility's future production will
be constrained by land-use restrictions on the protected nature
reserve.



Market Says Gorgon Investment Decision Imminent




6. (U) The Gorgon project partners are expected to make a final
investment decision by mid-September. The WA government granted
the project final environmental approval August 10, followed by
federal environmental approval on August 26 (Ref C). Chevron
has awarded AU$1.7 billion (US$1.36 billion) worth of services
contracts in the past six months in advance of final project
approval. The project is so large that Federal Resources
Minister Martin Ferguson recently called it a "stimulus package"
in itself, with up to 6000 jobs during construction, an
estimated A$33 billion (US$26.4 billion) worth of locally
purchased goods, and government revenue forecast to be A$40
billion (US$32 billion) over the life of the project. Both
analysts and spokespersons from rival producers have told us
that when the Gorgon project gets into full swing, they expect
the ensuing large demand for labor, supplies, and services will
constrain the timelines of stand-alone LNG projects that follow.



Chevron's Wheatstone: Fifth Conventional LNG Plant?




7. (SBU) Chevron is also fast-tracking development of its
wholly-owned Wheatstone project, announcing its intention
earlier this year to build a stand-alone LNG plant at Ashburton,
a small fishing port near Onslow. Underpinned by gas from
Chevron's Wheatstone and Iago gasfields, as well as from
third-party suppliers, Wheatstone will produce LNG for export
and natural gas for the WA domestic market. Significant
questions remain over whether and how the project will unfold:
several exploration leases involved in the project may be
subject to the federal government's new, tougher "use it or lose

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it" policy (Ref D); rival Woodside has argued that Wheatstone
gas could be more efficiently developed through third-party
supply arrangements with an expanded Pluto plant; and one
industry insider confided to us that the WA state government
"isn't happy" with the proposed site at Ashburton. According to
a senior resources lobby group official, Chevron officials
themselves have admitted the timeline for Wheatstone, 18 - 24
months behind Gorgon, is likely to slip once Gorgon is underway.



Woodside's Pluto Expansion: Third-Party Supply Options




8. (U) Third-party gas supplies are likely to be how Woodside
will begin expanding its Pluto LNG plant. The company, pursuing
an avowed corporate ambition to build a new LNG processing train
every two years, wants to retain the advantage of having a
skilled-up construction workforce already on site at Pluto to
fast-track a second and third processing train. The expansion
plans have come under pressure from the imminent go-ahead for
the Gorgon project, and Chevron's decision to build its own LNG
plant for Wheatstone rather than supply gas to Pluto. In a
significant move on August 20, Woodside announced it intends to
go forward with the front end engineering and design stage
(FEED) for the expansion. While no agreements with third-party
gas suppliers have been made public, a company insider told us
that the move to FEED "presumably means that at least one of
these third-party gas supply deals has been sealed."





Browse Basin: No Infrastructure




9. (U) Woodside is also pushing to establish an on-shore LNG
plant near Broome to process gas from its Browse project, in
which is it one of five partners (see Table 1),located off the
state's Kimberley coast. The remote Browse Basin is rich in
known off-shore gas reserves, some 60 tcf, but the nearby
coastal region has few roads, no commercial port, and limited
services. The area is also subject to complex Indigenous land
rights, and strong environmental concerns - it is considered one
of the world's last pristine wilderness regions. WA Premier
Colin Barnett has proposed developing an LNG "precinct" just
north of Broome to accommodate several LNG plants and associated
services, bring benefits to local Indigenous groups, and limit
the LNG on-shore footprint.



Pipelines, FLNGs




10. (U) However, other gas stakeholders, including some of
Woodside's Browse project partners, believe it could make more
sense to transport Browse Basin gas by pipeline for processing
at either the Pilbara to the west, or Darwin to the east, where
infrastructure and services are relatively developed. The idea
that long-distance pipelines could be commercially feasible was
underlined last year when Japan's Inpex decided to pipe gas from
its Ichthys field in the Browse Basin 480 kilometers to Darwin,
rather than to the WA mainland. Floating LNG facilities (FLNGs)
offer another alternative to on-shore processing plants. The
FLNG technology enables development of smaller gas fields, and
would potentially limit the involvement of the state
governments. Shell recently announced its intention to pursue
this option to develop its Prelude field in the Browse Basin,
with a possible tie-back to the Ichthys pipeline. The WA state
government adamantly opposes these options for Kimberley gas.
Barnett put it bluntly while on a recent visit to China to
encourage Chinese investment in the Browse Basin: "Kimberley

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gas will be processed in the Kimberley" (Ref E). The main
reason behind WA's objection to offshore processing is not about
royalties, which go directly to the federal government, as they
control operations in "Commonwealth Waters" more than 3 km from
the coast, but about the spin-offs from an on-shore facility,
including regional development, jobs, and the potential supply
of natural gas to the domestic market.



Inpex: Darwin Expansion




11. (SBU) Like WA's Pilbara, the Darwin LNG precinct is seen to
offer advantages for additional LNG developments in terms of
infrastructure availability. Econoff was told by a Japanese
government official that Inpex will announce its final decision
on the Darwin LNG plant by the end of the year, possibly as
early as October. According to the Inpex official, the company
has decided to avoid investment in WA because of the long delays
and poor regulation the company experienced under the previous
Carpenter administration. However, Inpex is under pressure to
have a kind of "base camp" established near Broome to provide
goods and services to its LNG exploration facilities in the
Ichthys Basin, an option that will provide jobs for WA.





Some Emission Trading Concessions




12. (SBU) Unlike rival coal seam projects in the east (Ref F),
the conventional LNG projects under consideration in Northwest
Australia will receive some protection from offshore competition
under Australia's proposed Carbon Pollution Reduction Scheme
(CPRS). The LNG sector was initially not going to receive
assistance, but has been granted access to the emissions
intense, trade exposed compensation system (Ref G) and this has
provided enough certainty that major gas programs are going
forward. Woodside CEO Don Voelte, who was an early and vocal
opponent of the CPRS, has been largely quiet on the subject
since April and the industry appears, unlike coal, ready to
accept the future emissions trading scheme.



Comment: Good Prospects for Development




13. (SBU) Notwithstanding the well-publicized jockeying among
rival oil and gas producers, at least some of Northwest
Australia's well-endowed conventional natural gas resources are
likely to be developed soon. Company officials from Woodside
and ExxonMobil told us recently that producers are all vying to
lock in forward sales contracts before a possible oversupply of
LNG in 2014 - 2016. Both the federal and state governments are
looking to LNG projects, and the Gorgon project in particular,
as potential "recession busters" during the downturn in the
global mining sector. Significant doubt remains over the
commercial viability of an on-shore LNG hub in WA's Kimberley
region, but developing LNG hubs in the Pilbara and Darwin,
third-party supply agreements, pipelines, and floating
facilities are all likely to come into play to develop the
region's stranded gas reserves. End Comment.






14. This cable was prepared jointly with Embassy Canberra.



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Table 1: LNG Projects in Northwest Australia, by company



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Project Consortium partners

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North-West Shelf Woodside Energy, BHP Billiton, BP,

Chevron, Shell, Japan Australia LNG

Browse Basin Woodside Energy, BHP Billiton, BP,

Chevron, Shell,

Gorgon Chevron, Shell, ExxonMobil

Ichthys Inpex, Total

Prelude Shell

Pluto train 1 Woodside, Tokyo Gas, Kansai Electric

Pluto train 2 Woodside

Sunrise Woodside, ConocoPhillips, Shell,

Osaka Gas

Scarborough ExxonMobil, BHP Billiton

Wheatstone Chevron

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Source: Company statements, July 2009.





Table 2: LNG Projects in Northwest Australia



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Project Expected Estimated

start cost (A$)

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North-West Shelf redevelopment 2013 $6.5 billion

Browse Basin (off Broome) tbc $30 billion

Gorgon (Barrow Island) 2014 $50 billion

Ichthys (off Broome) 2015 $26 billion

Prelude (off Broome) tbc $ 3 billion

Pluto train 1 (off Karratha) 2011 $12 billion

Pluto train 2 (off Karratha) 2013 $ 5 billion

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Sunrise (off Darwin) tbc $13 billion

Scarborough (off Onslow, WA tbc $12 billion

Wheatstone (off Dampier, WA) 2015 $30 billion

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Source: Company statements, July 2009.



CHERN