Whistling in Gladstone

WHILE the majors involved in Queensland's 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.

Whistling in Gladstone

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 there's probably the reverse, there's probably a discount associated because of the perceived risks," he told EnergyNewsPremium.

GLNG, APLNG and QCLNG 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 aren't 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 projects potentially being built on what is effectively the same patch of dirt.

So far synergies to share berths and other infrastructure haven't been exploited, but surely the companies involved would get together to share costs?

Intersuisse analyst Nicholas Wirubov doesn't think so.

"Certainly in the early periods of the time, the possibility for synergies in berth-sharing, in sharing LNG storage tanks, the use of ramp-up gas is there … to me it doesn't 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 can't see how the rationalisation could occur and all of the rhetoric coming out of Queensland doesn't support that."

While not ideal, having several LNG projects on the same patch of dirt isn't 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 ConocoPhillips' APLNG project has just reached FID, construction has already begun on QCLNG and GLNG.

The two CSG-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 aren't in a vacuum.

"It's a very serious situation and it's going to be as to one, getting people and two, what you're 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 isn't pouring a concrete slab for a driveway … you're talking about 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 QCLNG. I think they're talking three or four trains ultimately, and they've 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, they're 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 CSG hopefuls will be able to supply in big numbers.

"There's no doubt that there's a significant coal seam gas resource there, that's without question - it's been proven up," Wendt said.

"The technical aspects that need addressing are from the perspective of production. So far what we've seen from the coal seam gas players is production on a relatively limited scale. It's 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 CSG hopefuls, Wirubov says.

Santos has launched a $924 million takeover bid for CSG player EasternStar Gas, and Queensland Gas Company 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 CSG doesn't happen.

There's little doubt that CSG 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.

"There's 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.

"I'm still not quite sure what's going to happen in terms of how many wells are going to be drilled and the water that's going to be produced concurrent to the extraction of the gas.

"That's an issue I've spoken to a lot of technical people about and they've just shaken their heads and shrugged their shoulders."

If the big three LNG projects face these challenges, then what hope does LNG Limited's project at Fisherman's Landing have?

In the company's 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 Fisherman's Landing getting up and running.

"I think Fisherman's Landing is really the key candidate to be rolled into one of the other projects," Wendt said.

"It's 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?

"There'd probably still be a question mark over [the three major projects at Gladstone], which means that at some stage you'd 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 they'll 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, don't expect any of the big boys to walk away from their multi-billion dollar game of Russian roulette, mostly because they've already overcommitted.

"These guys have firm contracts, and we already know what that's 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.


A growing series of reports, each focused on a key discussion point for the energy sector, brought to you by the Energy News Bulletin Intelligence team.

A growing series of reports, each focused on a key discussion point for the energy sector, brought to you by the Energy News Bulletin Intelligence team.


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