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possible LNG merger

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?


Scale economies


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.


Asset planning


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.


R&D swap


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.


Social license


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.


Facilities optimisation


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.


Anti-gas activists


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.


Net Net


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.



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  • Richard Caillard
    Posted at 23:46h, 24 June Reply

    Hi Geoffrey, I read this blog with great interest. It seems to be collecting a number of great ideas surrounding the CSG (LNG) industry in rural QLD. While I am not intimately involved with the new CSG industry, it does appear to need a ‘step back and think’. To compare the size of the realestate footprints between conventional and unconventional LNG, it is massive. To move offshore (conventional LNG) platforms, semi-subs etc into position over well heads, establish LNG flows via a single pipeline and/or from subsea wellheads to take-off bouys and FPSOs/FLNGs and processing that gas, it is concentrated over small areas, not much larger than a football field.. When you look at the thousands of square kilometers that make up the CSG fields, clearly the operational infrastructure is far more widely placed and at significant operational risk.

    When you think of the expertise required to install the myriad of CSG infrastructures, I would question the deep expertise and finesse available in AU to ensure the infrastructures are both deployed to as-builts and operated to plan. One may think this is a rather cynical view, but based on my experience in the offshore oil & gas game, where plenty of mistakes have and are made, expertise has grown and nurtured over time in a very narrow industry. The CSG industry in new, narrow and different; it begs enthusiasm and encouragement to enable new careers, fostering CSG specific expertise.

    Aside from the financial business cases required to get FID, FEED etc, to drill, frack, run casing, install wellheads, etc, then connect all these 1000’s of wellheads to pipelines to converge on the various bespoke LNG trains, not to mention the volumes of water that need to be dealt with, it occurs to me that the mega-infrastructures deployed to enable the CSG industry in QLD is also at extreme operational risk.

    While the major oil & gas companies are in QLD, exploiting this natural resource, I question the end-to-end availability of expertise required to effectively deploy and operate in the same context as offshore oil & gas fields.

    It’s fine having the Shell, Arrow, Conocco mast heads, which is where the money is coming from, but I have concerns around the various transitions from project modes to steady-state, business as usual operations in the CSG space.

    While there may be good companies deploying the assets, there comes a time when they will hand the operational keys to the oil companies to continue with their 25-40 year major asset investments. More often than not, project over-spend seems to be the norm these days, and when the keys are finally handed to the operators, it’s the operators that need to immediately reduce cost to ensure returns on their investments. This is a risk in itself, compounded by legacy project issues and risks that may continue to linger. With CSG, the steady-state operations are likely to be fraught with issues and risks due to the diverse mass of infrastructures that need to be kept running, maintained and producing LNG over vast tracts of land, with lower gas prices expected for the foreseeable future.

    I would hope that someone is looking at how to reduce operational costs going forward. I do think technology has a huge space to play in with the CSG fields and I’m confident that if the right technologies are identified, operations may become more predictable with a virtual consolidation of the 1000s of square kilometers, leading to lower OPEX and risk..

    As with any mega project, there are always issues and risks left behind in the wake. This is just a sad fact. Unfortunately, for the operator, they will need to deal with both these issues and the reduced budget to ensure ROI on what I think would be a very marginal investment at best, given the current view and outlook on LNG gas pricing.

    It’s time to take the stetsons off, remove the spurs and make the CSG plays work. This requires consolidated effort from all stakeholders to ensure expected productivity can indeed be reached, safely, even though severe belt-tightening will be required.

    Leadership, good relationships and putting customers first is absolutely essential.

    The way I see things, for the oil companies to enable their strategic business outcomes, is by enabling their assets to become smart assets. This will help reduce and remove costs associated with unplanned outages, improve productivity, increase operational effectiveness, reduce operational risk and improve profitability.

    Further, downtime costs vary widely by industry, but in general, costs are greatest for the oil and gas, mining and utilities industries.

    A U.S.-based study found that compared to other asset intensive industries, which experience downtime ranging from 3-5%, the oil and gas industry suffers at 5-10% downtime. These companies also tend to have more valuable and difficult to maintain assets, such as remote offshore rigs, so even a 1-2% loss in production time can equal a major cost to operations. It’s not uncommon for an offshore platform in crisis mode to run at 30% unplanned downtime.

    I couldn’t find any data for the CSG industry, but I’m sure the numbers would be a lot higher.

    I think there needs to be a conversation around the transitions from project mode to steady-state mode. Any infrastructure modifications or corrections need to be captured and costed now, while in project mode. While the operators may not like that, it will be far easier to raise project change requests and resultant funding now, than to wait until steady-state ops, as there will be little or no money at that point and it will be far easier and more cost effective to amortise project insurance activities against project risk over the expected life of these new CSG assets.

    ‘just my thoughts.

    • Geoffrey Cann
      Posted at 06:05h, 26 June Reply

      Richard –

      thanks for the comments. Your observations about the size and scale of the business footprint and the number of moving parts is spot on. The CSG projects have been focused on cost reduction now for months, if not years. QGC began an extensive streamlining effort shortly before Train 1 was commissioned, and the other two projects have been equally aggressive in pursuing cost performance as their trains moved to production. There is a real risk now that the cost out efforts have started to target valuable competence and not just project cost.

      The projects so far have done an exceptional job in transitioning to full and safe operations. All are actively pursuing extra cargo production because the kit and plant is proving to be reliable and manageable. To make up for the lack of storage in the system, the projects have added lots of sensors to wells and kit to provide high levels of operational visibility. It’s working well.

      The next areas of cost and productivity improvement will likely have to come from improved collaboration between the projects as is now underway in the North Sea – producers are collaborating on spares management and well engineering.

      Great commentary – I appreciate it.

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