Month in Petroleum: May 2010

CSG-LNG projects and that tax

The prime minister announced the government’s plan to impose a 40% tax on resource profits on Sunday, May 2. Since the announcement, the market has been a sea of red with shares in resources and CSG companies tumbling.

The tax has caused a great deal of uncertainty in the CSG industry with Origin Energy the first CSG major to say the tax would add a significant cost to its Australia Pacific LNG project at Curtis Island.

“The RSPT has introduced significant additional cost to APLNG and uncertainty attached to this tax could affect the project schedule,” Origin managing director Grant King said.

At the Australian Petroleum Production & Exploration Association Conference in Brisbane later that month, King said the APLNG joint venture was still targeting a final investment decision by the end of 2010 and would work hard to overcome any roadblocks.

Santos, which is developing the Gladstone LNG project with partner Petronas, pushed back FID by around six months to later this year, although this is not expected to affect the anticipated 2014 start date.

Shell which is also planning CSG-LNG projects at Gladstone was reviewing the tax proposals and said it would look at the package of measures to determine the overall impact on its business.

The RSPT also triggered more talk of consolidation in the CSG industry with analysts saying the tax would prompt the CSG-LNG majors to merge as much as $70 billion worth of gas projects.

RBS Morgans analyst Nick Burns said the most likely scenario would be that Santos would combine its GLNG project with the venture proposed by Shell while the APLNG project owners could merge their development with BG Group’s Queensland Curtis LNG venture.

“Ideally, all of these projects now would come together in a single mega-project,” he said.

“That would lead to the most cost savings and, from a workforce perspective in particular, would make most economic sense.”

Knocking the RSPT

The 50th APPEA conference in Brisbane provided a good platform for speakers to voice their discontent against the proposed tax.

Opposition Leader Tony Abbott led the charge, describing the proposed tax as a “moonbeam from the larger lunacy”.

“You would think that given that any sane government would be doing everything it humanly could to encourage the resource sector to expand. But no, that’s not what the current government has done.

“The current government has decided in its wisdom the best way to encourage you to expand is to hit you with a great big new tax,” he told delegates at APPEA.

Shell Australia upstream executive vice-president Ann Pickard also articulated her view on the tax saying that while Shell considered the RSPT to be flawed, the petroleum resources rent tax was a good example of a super profits tax.

“I’m pretty happy with the PRRT, to me that is a true super profits tax, in the ideal world I would like to just keep the PRRT,” she said.

“Despite its name, the RSPT is not a good super tax; it has a negative impact on the industry across the board.

“Reaching a compromise on this is important, there is a good consultation process going on. But any tax has to take into consideration our cost base and the risk we go through. Anything that models after the PRRT is going to something that would make us happier.”

Smaller oil and gas companies also got to voice their concerns about the tax through APPEA chairman Eric Streitberg, who is also Buru Energy executive director.

Streitberg said the oil and gas industry had become successful by taking calculated risks in the pursuit of rewards, and that the government’s proposal showed a “fundamental and disturbing lack of appreciation” for what drove the industry to invest.

He said the tax increase would not be compensated by the proposed resource exploration rebate.

“This will not achieve the same thing that a flow-through share scheme would have done and has the potential to lead to some very poor exploration outcomes.”

GLNG gets environmental green light

While the industry was reviewing the proposed tax changes, Santos’s GLNG project became the first CSG-LNG project to get conditional environmental approval from the Queensland government.

The $7.7 billion project received the green light with strict conditions following the review of the project’s 13,500-page environmental impact statement.

The approval covers the development of CSG resources in the Bowen and Surat basins around Roma by drilling 2650 wells over 25 years; construction of a 435-kilometre pipeline from the gas fields to the coast; and construction of up to three processing trains at an LNG plant and export facility on Curtis Island.

Some conditions with the approval involve Santos contributing to substantial community infrastructure, providing extra housing in Gladstone and Roma for the additional workforce, and establishing three regional community consultative committees to keep residents informed of the project’s progress.

GLNG president Rick Wilkinson said the approval was a significant milestone as the project builds momentum towards a final investment decision this year.

Queensland Premier Anna Bligh said the news moved Queensland a step closer to a new gas industry and, if all the necessary approvals were granted along with confirmation of a FID, the project could be shipping supplies from 2014.

ESG investigating possible Newcastle LNG plant

In New South Wales, CSG explorer Eastern Star Gas announced it was considering exporting LNG from Newcastle under an agreement with Japan’s Hitachi and Toyo Engineering Corporation.

Under a memorandum of understanding, a feasibility study for the development of a mid-scale LNG plant using Hitachi/Toyo’s electric motor driven technology will be carried out.

“The feasibility study follows earlier independent studies, commissioned by ESG, that concluded export of LNG via Newcastle is both technically and commercially viable,” ESG managing director David Casey said.

“An established port in close proximity to Narrabri, Newcastle, is the stand-out location for consideration for an LNG project in NSW.”

The proposed 1 million tonne per annum project is expected to cost more than $2.5 billion – consisting of more than $1 billion for gas production work, $1 billion for the plant and $500 million for pipeline infrastructure.

Sun yet to rise in Timor Sea

Over in the west, Woodside has spent the month trying to convince East Timor to accept a floating liquefied natural gas development for the Greater Sunrise fields in the Timor Sea.

Woodside announced the decision on FLNG as the preferred development option for the Greater Sunrise fields at the end of April.

The company believes the proposal is compelling and provides the best technical and commercial development option.

However, East Timor continues to stand by its opinion that piping the gas to a plant on its shores is a viable option with Prime Minister Xanana Gusmao accusing the Sunrise joint venture of trying to steal the country’s petroleum resources.

“I don't believe Woodside company because it is a liar,” Gusmao said.

“They intend to steal our oil and gas in the Timor Sea as they don't want to bring the pipeline to East Timor.”

He added that the Sunrise partners had broken their promise to provide training for East Timorese engineers, saying only 30 locals had been hired for their Timor Sea operations.

Northern Territory Chief Minister Paul Henderson also expressed disappointment about the Sunrise JV’s decision to develop the Greater Sunrise fields using FLNG but was quick to latch on to the opportunities it presented.

“Obviously that was a disappointment for the Woodside joint venture to make that decision to go floating. I still believe, and have had discussions with Don Voelte, there will still be very significant opportunities for economic growth and business opportunities for the construction and the ongoing service and supply of an offshore floating LNG plant,” he told reporters at APPEA.

Inpex delays Ichthys FID, start-up

While Woodside deals with East Timor, Inpex has its own issues for the giant Ichthys LNG development in the Browse Basin.

The company delayed FID for the development for the world’s largest floating processing platform to the fourth quarter of 2011 while production start-up has been pushed back to the last quarter of 2016.

President Naoki Kuroda said the Ichthys project was extremely large and complex, and Inpex was taking the time to optimise all aspects of the project’s design to minimise the risk of increasing costs.

“This will require additional time and effort to achieve, but will ultimately lead to a more robust and cost-effective design,” he said.

Inpex is now focusing on reducing the weight of the offshore central processing facility and allowing more time to prepare and evaluate tender proposals.

Ichthys will have an initial output of 8.4 million tonnes per annum of LNG from two trains. It will also produce about 1.6MMtpa of liquefied petroleum gas.

Wednesday, 9 June 2010
Petroleumnews.net
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