07 Mar Could a merger of Queensland’s LNG projects work?
Is a tie up of the LNG projects in Queensland something to consider? I wondered about this when I heard that one of Queensland’s LNG industry executives and some investment bankers were in the media speculating about the possibility of the LNG projects combining forces. Arguably the landscape is shifting already since Royal Dutch Shell has acquired QGC (one of the three LNG projects), and has a 50% interest in another large gas project, Arrow Energy.
Here’s my view of the idea.
The Current landscape
In case you’re not across it, Queensland has three active LNG projects that simplistically look very similar. They prosecute the same general resource (coal seam gas) via a large and growing network of simple gas wells (simple in that there’s no sulphur or other nasties mixed in with the gas), connected to field compression stations, treated via central processing plants, shipped using big transmission pipelines, chilled in three LNG export plants and ferried to Asian markets.
The projects already share contractors, have a common regulatory and legal framework, have the same tax authorities, operate in the same general basin. And in an extreme case, the LNG plants were built by one contractor at the same time. They even swap gas between themselves courtesy of a manifold installed on Curtis Island.
I say “simplistically“, because really, the similarity is only a methane molecule deep. The projects have profoundly different owners and ownership structures, different capital structures, different philosophies about how to prosecute the gas, different systems and business processes, and different technical approaches at virtually every possible decision point. Even the LNG plants, while sharing a common technology (ConocoPhillips’ Optimized Cascade Process), look different from the air, sporting three different flare stack designs, just one visible example.
The LNG projects are at different development stages too, with two of the projects in early stage commissioning of their first LNG trains, and one in full 2-train production.
Merging these businesses will be devilishly challenging.
Show Me the Money
It’s not really clear that there’s a lot of value that could be released in a merger. After all, the wells are drilled, the pipes are laid, the plants are operating, the gas sales agreements are in place. So where’s the money?
The LNG sector rewards scale, and the biggest players in the industry have considerable scale effects on their side. The 2 big Qatar LNG projects produce 37-45 million tonnes annually each, compared to 9 for each of Queensland’s projects. These scale effects give the Qataris better purchasing terms with suppliers, better access to capital, lower corporate costs, better utilisation of assets and shared overheads. Today, arguably, Queensland’s LNG projects are hampered by being too small relative to market leaders, and not much growth opportunity to get to scale. And every advantage could become key with the onslaught of US gas priced on a very different basis.
The coal seam gas industry will need to spend capital on new gas field developments for many years. Imagine having a broad view of all potential gas field investments across the whole of the sector, and selecting only the very best, or perhaps targeting the most urgent (because of impending permit expiry), or perhaps actioning those with ready access to infrastructure, or perhaps by bundling permits to create larger plays.
Better asset planning would result in a reduction of the amount of capital invested, an improvement in social license, an enhancement to the royalty streams, and a general lowering of the cost of the industry.
Australia’s competitors, particularly those countries dominated by national oil company champions, exploit this advantage.
Gas supply optimisation
With so much gas moving around (each Queensland LNG train is the equivalent gas demand of all of New South Wales), optimisation of the flow of gas is a clear benefit area. Too much gas can overwhelm mechanical capacity, must be sold at spot rates domestically, and is wasteful. Too little gas robs assets of utilisation and revenue, pulls gas from the domestic market and irritates politicians. Small scale operations like Queensland’s LNG projects have only so much optimisation potential, given the size of the domestic market.
All the players in the industry have developed proprietary intellectual property (IP) that enable superior field performance. Pooling this R&D would enable the industry to deploy the “best of the best“, and could help the industry accelerate its move down the cost curve. COSIA in Alberta provides a useful model for how collaboration in R&D can be achieved. COSIA members pool some of their R&D budgets rather than each spending on the same topic only to arrive at the same conclusion.
Intellectual property includes reservoir management, subsurface geology, field design and operations, well head designs, water management, rehabilitation, stakeholder engagement.
As relatively small players in a global industry, Queensland’s LNG projects tend to place a lot of value on their IP, viewing it as key to their success, and are reluctant to share it too widely.
Maintaining access to land is the most critical social license lever to success in the CSG sector. Already, Queensland is the sole Australian state to continue to permit hydraulic stimulation of its reservoirs. Resources in NSW, VIC and NT are now effectively stranded because of bans or restrictions on 50 year old oil and gas techniques like fracking.
There’s bound to be good, better and best practices in managing social license, and poor practices have the effect of tainting the whole sector. If ever there was an area where knowledge sharing and identification of best practice becomes existential, it has to be in social license areas.
Each of the LNG projects has built a range of facilities that could be better utilised (facilities include water treatment assets, central processing plants, pipelines, power substations, camps, laterals, and so on). Power-related assets are particularly troublesome as lead times for new power infrastructure are very long.
Optimisation of the assets is arguably achievable with a single operator, or perhaps more than one operator, but singularly focused on a narrow asset class (like the LNG plants, or the pipelines).
Is this a compelling list of opportunity? It’s certainly more than the usual oil and gas merger recipe which entails squeezing the corporate overheads, selling off a few non-core assets and doing a bit of financial engineering. You’d still want to get under the covers and see the math.
The Speed bumps
Setting aside the enormous complexities posed by ownership and the number of assets in play, I can see a few more barriers that would give pause to any great change in the sector.
Anti trust regulators
I can see the anti-trust regulator getting pretty wound up about changes to the sector, particularly if it involves moving towards a monopoly market structure (not that the export side should matter but a single LNG player would have a lot of influence on wages, supplier costs, local pricing, and so forth). That usually brings the regulator out swinging.
Wholesale gas and domestic market
Now that the other southern states have effectively trashed their own gas industries through bans, restrictions and excessive regulation, Queensland plays a very large role in the gas industry in the populous east. There’s already worry about the state of the wholesale gas market, the possibility of gas reservation, and the challenges gas buyers have securing long contracts. I can easily imagine the hue and cry over yet more consolidation.
A small but noisy slice of Australia’s population tends to react poorly to change, particularly if it has anything to do with changing romantic ideals of rural life, and they have outsized influence over Australia’s political class. They will likely oppose any change that has the appearance of increasing the role of big industry in their communities. They also like the fact that the gas industry is fragmented, not well organised and unable to operate with a single voice.
In my view, the benefits are very intriguing, as they are greater than what I’d usually see, but the challenges of pulling off a big consolidation are absolutely legion. Never say never, of course.
What could work is a step up in collaboration, which, done well, can help capture many of the benefits of a full industry merger, without encountering the speed bumps.