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 PERTH 00000040 001.2 OF 006 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 PERTH 00000040 002.2 OF 006 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 PERTH 00000040 003.2 OF 006 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 PERTH 00000040 004.2 OF 006 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. PERTH 00000040 005.2 OF 006 Table 1: LNG Projects in Northwest Australia, by company -------------- -------------- Project Consortium partners -------------- -------------- 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 -------------- -------------- Source: Company statements, July 2009. Table 2: LNG Projects in Northwest Australia -------------- -------------- Project Expected Estimated start cost (A$) -------------- -------------- 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 PERTH 00000040 006.2 OF 006 Sunrise (off Darwin) tbc $13 billion Scarborough (off Onslow, WA tbc $12 billion Wheatstone (off Dampier, WA) 2015 $30 billion -------------- -------------- Source: Company statements, July 2009. CHERN