Floating LNG Upsets Oil and Gas Outlook in Australia, Southeast Asia

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Floating LNG Upsets Oil and Gas Outlook in Australia, Southeast Asia

Floating liquefied natural gas is revolutionizing the oil industry.

A push towards massive offshore refining pontoons for processing crude and liquefied natural gas (LNG) is gaining momentum and forcing governments – which had pinned their economic development plans to traditional oil and gas jobs – to rethink their strategies.

It’s a global phenomena but one that is making its mark in Southeast Asia where high crude prices have improved the economic viability of offshore oil and gas fields in areas that are difficult to reach and hamstrung by underdevelopment and sometimes difficult politics.

This was the case with Indonesia, Cambodia, the Philippines and East Timor. As the boom in oil prices gathered pace, less economical fields became viable and governments hastily opened their doors, exposing their workforces to companies that had previously preferred to work with established sources for oil and gas.

But infrastructure – roads, ports, railways, facilities for refining and storage, and a trained workforce – is costly. Further, the engineering realities of building a pipeline across deep sea trenches – sometimes thousands of meters deep – are prohibitive, particularly as oil prices fell dramatically from record highs. 

Some governments, like Australia and Indonesia, are accepting the realities and experimenting with offshore refining, which eliminates the need for pipelines and is ideal for accessing resources in remote areas. Other governments are considering this option, but some like East Timor are not keen.

Built on barges, a floating pontoon is bigger than an aircraft carrier and capable of refining oil and freezing LNG at minus-162 degrees Celsius needed for export. Shell is constructing the world’s first such pontoon for use at its operations at the Prelude and Concerto fields in Australia’s North West Shelf. Other contractors are also rethinking their strategies.

Escalating costs have forced Woodside Petroleum to abandon AUS $100 billion worth of projects, including plans to build an AUS $50 billion LNG export facility near Broome. BHP Billiton has meanwhile cancelled two plans worth a combined AUS $50 billion at Olympic Dam in South Australia and Port Hedland in West Australia.

Woodside is now considering its floating LNG (FLNG) options. Inpex Corp is also considering an FLNG project in the Abadi gas field in Indonesia’s Arafura Sea. Its geographical make-up is similar to the Greater Sunrise gas field in East Timor, where Woodside must overcome the enormous depths of the Timor Trough. It also wants FLNG deployed here but East Timorese officials have balked and remain keen to construct traditional onshore operations and provide well trained jobs for the country’s population.

For companies, the potential financial benefits of FLNG technology far outweigh the initial outlays. FLNG also substantially lowers lead times, poses much less of an environmental risk and has a lower impact on indigenous people living ashore.

“This is likely to position floating LNG well as the market becomes increasingly competitive and could ultimately crowd out some conventional developments,” a Macquarie Research paper on the Australian energy sector noted.

But this doesn’t amount to the type of development promised by politicians who have promised an El Dorado of downstream industries that would prosper off the backs of the offshore ventures. This has put East Timor and its future earnings on a precipice.

Last week officials in Dili alleged that Australia had engaged in espionage and did not act in good faith during 2004 negotiations on a treaty for Sunrise’s development. It was the latest twist in efforts to invalidate the royalty sharing treaty between Australia and East Timor. Dili wants fresh arbitration but Australia insists the treaty still stands.

This – combined with differences in the use of FLNG, the development of fire and ice technologies and the advent of fracking – is making East Timor a less desirable destination for the oil and gas industry. Other countries in the region that have pinned their hopes on developing an oil and gas industry are no doubt watching this closely.