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Whistling in Gladstone
Tuesday, 2 August 2011 Jam es McGrath

WHILE the majors involved in Queenslands multi-billion dollar liquefied natural gas projects may be pleading with investors to look on the bright side of life, several brokers are noticing investors are failing to whistle the tune.
In a recent research note, JP Morgan picked up on the negative sentiment affecting Santos share price. We think that the market is firstly not recognising the value in the sanctioned GLNG project and at the same time is over-fixated on the challenges to executing GLNG, it said. Analyst Gavin Wendt has picked up on the scent. I think in the past there were premiums attached to the share prices of LNG exposed companies like Santos, but now theres probably the reverse, theres probably a discount associated because of the perceived risks, he told EnergyNewsPremium. GLNG, APLNG and QC LNG have all gone through to a final investment decision, are backed by experienced companies and offtake deals have been inked for some of the LNG. The potentially transformative effects to the Queensland economy and the companies bottom line arent in question, but why are investors looking at the project in a darkened light? Part of the problem could be that you have four major Early construction works at the GLNG logistics projects potentially being built on what is effectively the facility, Gladstone same patch of dirt. harbour. Courtesy Santos So far synergies to share berths and other infrastructure havent been exploited, but surely the companies involved would get together to share costs? Intersuisse analyst Nicholas Wirubov doesnt think so. C ertainly in the early periods of the time, the possibility for synergies in berth-sharing, in sharing LNG storage A erial view of GLNG site on Curtis Island, July 4 tanks, the use of ramp-up gas is there to me it 2011 doesnt make any economic sense to have four LNG projects going on independently, he told ENP. Given that three of the projects have reached independent FID, it makes you think that egos are getting in the way. Given the cost pressures involved, it would not surprise me at all to see some sort of strategic alliance eventuating. However, I just cant see how the rationalisation could occur and all of the rhetoric coming out of Queensland doesnt support that. While not ideal, having several LNG projects on the same patch of dirt isnt a major hurdle, however getting the projects built may be more troubling than people assume. Every man and his dog has an opinion about how to solve the skills crisis, but nothing substantial has been done to meet the challenge the simultaneous ramp up in large construction projects over the next five years presents. While Origin and C onocoPhillips APLNG project has just reached FID, construction has already begun on QC LNG and GLNG. The two C SG-LNG projects represent $31 billion in committed capital expenditure. Around 5600 people are currently working on the two, while the sector has the capacity to create 18,000 direct and indirect jobs. A big number in isolation, but the Queensland LNG projects arent in a vacuum. Its a very serious situation and its going to be as to one, getting people and two, what youre going to have to pay them once you get them there, Wendt said. Wirubov backs the concern. There are plenty of people who are nominally unemployed, but do they have the right skill set to be expert concrete pourers? he said. This isnt pouring a concrete slab for a driveway youre talking about
Construction underway for the Q CLNG project, courtesty BG Group

Illustration of A PLNG project at Laird Point, Curtis Island, courtesy O rigin Energy

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megastructures which have to take a lot of stress. First LNG exports for the three FID projects is expected by around 2014, which invariably means similar construction timelines, however the projects may just be putting the cart before the horse. None of them have enough 2P reserves to meet their base commitments, even QC LNG. I think theyre talking three or four trains ultimately, and theyve committed to two trains which is 8.5 million tonnes per annum, Wirubov warned. On my numbers, and this is using third party reserves numbers, theyre almost at 3Tcf, which is 2000 to 3000 petajoules short on 2P of meeting the 8.5 million tonnes. Everybody is short on 2P. With the LNG projects essentially a billion dollar wager on the future of the Queensland LNG industry, players will be hoping C SG hopefuls will be able to supply in big numbers. Theres no doubt that theres a significant coal seam gas resource there, thats without question its been proven up, Wendt said. The technical aspects that need addressing are from the perspective of production. So far what weve seen from the coal seam gas players is production on a relatively limited scale. Its been gas that has been produced for a domestic market up there in Queensland. Questions over supply are at the heart of recent deals between the players and C SG hopefuls, Wirubov says. Santos has launched a $924 million takeover bid for C SG player EasternStar Gas, and Queensland Gas C ompany has recently entered into a $130 million development agreement with Drillsearch for a 60% stake in ATP 940P. While the LNG players jostle for supply, it may all be for nought if an expected ramp up in C SG doesnt happen. Theres little doubt that C SG faces increased community pressure over environmental concern, with golden girl Olivia Newton-John the latest to jump on the anti-fraccing bandwagon. According to Wendt, the environmental crusaders make a good point. Theres still a question mark in my mind over the gas production and the impacts on the environment how sustainable it is in terms of being able to produce in those sorts of volumes and rates, he said. Im still not quite sure whats going to happen in terms of how many wells are going to be drilled and the water thats going to be produced concurrent to the extraction of the gas. Thats an issue Ive spoken to a lot of technical people about and theyve just shaken their heads and shrugged their shoulders. If the big three LNG projects face these challenges, then what hope does LNG Limiteds project at Fishermans Landing have? In the companys latest quarterly it said it expected to tie-up a gas supply deal in the third quarter, but both Wendt and Wirubov are sceptical about Fishermans Landing getting up and running. I think Fishermans Landing is really the key candidate to be rolled into one of the other projects, Wendt said. Its less advanced, and the opportunity is there for a more seamless merger into one of the larger projects. There are still some question marks there over resources and size, but I can see that easily merging. So looking into the cloudy eight-ball, what is the prospect of cost overruns or even worse, cancellation? Thered probably still be a question mark over [the three major projects at Gladstone], which means that at some stage youd figure there would be a consolidation into two projects that makes sense, Wendt said. It would be quite silly to have the three projects competing against each other. I think for the moment though theyll be prepared to go it alone and see how things pan out. While Wirubov said the prospect of cost blowouts was almost a foregone conclusion, dont expect any of the big boys to walk away from their multibillion dollar game of Russian roulette, mostly because theyve already overcommitted. These guys have firm contracts, and we already know what thats doing to Woodside with its 12 month delay in that they have to go out onto the market and buy LNG to supply their clients, he said. All three would have to go out into the market and buy LNG for their contracts if they decided to pull the pin. While the prospect of cost blowouts and timeline overruns are very real for the Queensland LNG projects, the upside will keep the big boys facing the audience with a grin for a little while longer yet. C lick here to read the rest of today's news stories.

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