The New Global Gas Market: Securing Australia's Share
John D. Gass, President
ChevronTexaco Global Gas
Australian Petroleum Production and Exploration Association
As many of you know, ChevronTexaco traces its history in Australia back 50 years to the nation's first major oil discovery at Rough Range. This year, we will celebrate 40 years of successful operations at the Barrow Island oil field. We've produced more than 300 million barrels there and established a globally-respected model for environmental stewardship that we continue to improve on today.
We're also a long-time participant in the North West Shelf Project. And today — with our Perth team growing and the Gorgon joint venture gaining momentum — our Australian operations employ more than 450 people, and nearly all of them are Australians.
I'll talk first about the major trends in global natural gas. And I'll tell you how we're approaching the natural gas business at ChevronTexaco. I'll talk also about what all of that means for Australia. I'll provide an update on Gorgon, the nation's premier opportunity to secure a bigger share of the global gas market and to create a new Australian gas hub. And I'll offer a vision of the future that I think you will agree is both achievable — and worth fighting for.
In fact, there has never been a time of greater opportunity for Australia's natural gas sector — or for natural gas in general. Of course, gas became recognized in the 1990s as the "fuel of choice," not only for its quality and versatility but for its lower emissions of pollutants and greenhouse gases.
This upward curve was both visible and predictable. But the recent surge in opportunity has still been surprisingly pronounced. A strong world economy, rising global demand for electricity and the strong desire to reduce air pollution have set off a boom in construction of gas-fired power plants that still hasn't peaked.
This is not only stimulating gas demand and prices, it is permanently expanding the global gas market. In these busy times, it's easy to forget that only six years ago, the Asian economic crisis was casting a dark cloud over both the present and the future. I recall taking part in the early visits by Australian industry and government officials to China to talk about Australian liquefied natural gas (LNG). Those visits ultimately paid off, first with the successful award of the Guangdong LNG supply contract to the North West Shelf Venture in 2002, and then again last year with the agreement between Gorgon and the China National offshore Oil Company, signed here in Canberra.
Today, because of the economic growth in China and Asia — and many other factors — the world's fastest-growing fuel resource is gas. And the gas industry's fastest-growing sector is liquefied natural gas (LNG). We've entered a time of transformation in the natural gas business that will redefine the energy industry in several important ways.
LNG is becoming a bigger business for oil and gas companies as well as for the countries where they operate, thanks mostly to cost-saving technologies and economies of scale. This exciting business will grow large enough to create a new energy-commodity market in LNG.
International relations will evolve as more countries become sellers or buyers of LNG. This will strengthen a number of existing energy-trade relationships and create many new ones as well. As the global gas story unfolds, other technologies — including gas-to-liquids, or GTL — will provide new ways to help meet longer-term energy needs. And finally, energy companies will evolve to compete for gas opportunities in new ways.
According to forecasts from the International Energy Agency and others, worldwide demand for natural gas is expected to more than double over the next three decades. And during the same period, world gas demand is expected to grow twice as fast as oil demand. And gas is expected to increase from just over 20 percent in 2000 to not quite 30 percent of the energy mix by 2030.
Of course, all major energy sources are expected to keep growing, with oil retaining the largest share. However, gas is expected to overtake coal as the world's second-most-important primary fuel.
Of course, the most exciting story here, particularly for Australia, is the LNG story. Let's consider the size of the prize: In the United States alone, demand for LNG by 2010 will be eight to 10 times what it is today, according to forecasts by the U.S. National Petroleum Council and others. Europe's LNG imports will also grow sharply. And in Asia, according to a study by the East-West Center, annual LNG demand will grow from 87 million tons next year to as much as 138 million tons by 2015, and some believe the volumes will be even larger.
But demand isn't the only trend worth mentioning here. Costs are shrinking up-and-down the LNG value chain for liquefaction, shipping and regasification. New developments in metallurgy, economies of scale and design, combined with better project management, have cut the costs of LNG facilities and tankers by 30 percent to 50 percent compared with the early years. In short, thanks to our industry's relentless focus on competitiveness and innovation, technology has become the primary enabler for a new era of globalization in natural gas.
As an outgrowth of the expanding LNG trade, we will see a new global market develop that looks more like the market for other commodities. LNG by its nature will remain largely a business characterized by long-term commercial relationships. After all, this is what investors, producers and customers want and need.
But greater flexibility is becoming a fixture in contracts, and a spot market is emerging. LNG cargoes have been redirected in midocean from one customer to another. And cargoes from established projects have filled gaps and supplemented core supplies on a case-by-case basis. As demand grows and the mix of sellers and buyers expands, we can expect to see more of this liquidity and flexibility in the market.
For customers, this will mean more choice, more competitive pricing, more diversity as well as more security of supply. For producing countries, this will help open new LNG markets, to commercialize more of their untapped gas resources and enable them to enjoy greater rewards from their natural resources. For Australia, LNG markets are the key that will unlock the nation's vast gas fields far from shore. That, in turn, will create more options to supply the Australian domestic market with gas for power generation, direct heat or feedstock for further processing.
Gas will be coming from northwest Australia, and its target markets are Korea, Japan, China and North America. Of course, there is also the potential market of large-scale new industrial users to light up Australia's northwest skies, and one day, perhaps, gas customers on the other side of the continent.
But of course, Australia can't expect to have this tremendous marketplace all to itself. Just to look briefly at some of the big competitors.
Indonesia, one of the world's largest LNG exporters, is now promoting its Tangguh project, with China and Korea as the main customers. Qatar holds almost unlimited reserves, and it is a long-established supplier to Japan and Korea, with new projects aimed at North America and other markets.
Nigeria has one LNG project already supplying Europe and another project planned to supply the United States. Russia, with even larger reserves than Qatar, intends to supply LNG from the Sakhalin development to Japan. I think you can see: it's a very tough and crowded league. And the world's future LNG customers couldn't be happier about the stiff competition between future suppliers.
I should add here that LNG isn't the whole story for global gas. Natural gas is redefining itself in other ways, and the range of opportunities is broad. Most of us think of gas and oil as very different. But to the chemical engineers, these two primary energy resources have lots of molecules in common. Just like oil, gas can be refined into other products.
Information from the Western Australian Department of Industry and Resources shows the range — from ammonia and methanol to GTL products, including base oils, to ethylene. And gas can be seen not from a petrochemical standpoint, but as energy — and in this basic role, it becomes an enabler for the metals-extraction industry.
As for GTL, the biggest prospect is the market for liquid transportation fuels. As global trucking expands, diesel remains the unchallenged king in the industrial sector. But it is also blamed for air pollution problems in many parts of the world.
GTL technology, by contrast, produces an energy-packed, synthetic alternative to conventional diesel that contains no sulfur and no aromatics. The world is taking notice, and that spells opportunity.
In our own case, our joint-venture company Sasol Chevron is advancing a new GTL project in Nigeria to produce 33,000 barrels of liquids each day. We anticipate plenty of European demand for this production when operations start up in three or four years. At the same time, in Qatar, ChevronTexaco has announced our intent to invest upwards of $6 billion in GTL projects with a potential combined capacity of 230,000 barrels per day.
In looking at all of this change and opportunity, our company decided a fairly dramatic response was in order. Last year, we created ChevronTexaco Global Gas. We put the components of the gas value chain downstream from liquefaction under one roof: natural gas marketing and business development, shipping, regasification, pipeline, power generation and gas-to-liquids. Our objective: to build a high-impact global gas business for ChevronTexaco.
We have strategies in place for GTL, for the Atlantic Basin and for the Pacific Basin LNG markets. Our plans include LNG projects in Australia and Africa. And we want to build two new import terminals, both of them offshore, in North America.
I say this to make the point that today's global gas business requires seeing the whole picture, and working on all the parts of the value chain simultaneously. It also requires strong partnerships, partnerships between host communities, government and customers.
Fortunately, Australia already understands this, thanks to its long experience with the North West Shelf Project. Since shipping its first cargoes to Japan in 1989, the North West Shelf Joint Venture has established itself, and indeed Australia, as one of the world's safest and most reliable LNG suppliers.
Because of its location, the North West Shelf can deliver LNG to Asian customers in half the time that is required by Middle East suppliers. Today, the North West Shelf has a 25-year agreement in hand to supply the new Guangdong LNG terminal in China.
All the while, the joint venture has worked closely with Australia's political leadership to promote energy trade and regional economic relationships. Just as impressive, the project has accomplished all of this while giving Australia a tremendous return on investment.
Benefits include a multibillion-dollar boost to Australian exports and the creation of many thousands of direct and indirect jobs. All Australians benefit from the taxes and royalties that the joint venture partners pay to the state and federal government. The $2.4 billion fourth LNG train and second trunkline, designed to meet new supply commitments to Japan, will boost LNG production capacity by 50 percent later this year.
This project has provided a further boost to the state and national economies, including the creation of more than 2,000 construction jobs. Australian companies have won three-quarters of the contracts for the total project. And as the market continues to develop, we look forward to the North West Shelf adding a fifth LNG train.
But North West Shelf has done something else for Australia. It has laid the foundations for a world-class center of expertise in LNG in Perth. And that foundation is growing stronger each day with the depth and strength of the Gorgon project team now working flat out to advance Australia's next giant LNG venture.
I know many of you are familiar with this project. In the last six months, Gorgon has made impressive progress. We have obtained the necessary legislative authority to use Barrow Island as the site for the LNG plant and we have embarked on the environmental approval process.
And in connection with the supply agreement announced with CNOOC, we may ultimately see them taking an equity position in Gorgon. We're pleased also to see that this future partner, and the Zhejiang Province, have announced that they will work together to develop the third LNG receiving terminal in China's energy hungry market. We've made good progress toward major agreements to supply Gorgon LNG to the North American West Coast.
And we've continued a dialogue with potential customers in Western Australia for the eventual sale of Gorgon gas into the domestic market. I have tremendous confidence in this undertaking and tremendous pride in the people working on it. As a nationally significant project, Gorgon, I believe, symbolizes Australia's great potential and capabilities in the gas business.
All the elements for success are here. Australia has a colossal resource, more than 40 trillion cubic feet has already been discovered on the Greater Gorgon area. ChevronTexaco and our partners have technology, experience and know-how.
The Gorgon project is a solid joint venture of world-class companies who bring a great depth of expertise in LNG. And we are all committed to making the major new investments required in Australia. We've made steady progress on environmental permits and other regulatory requirements — owing to our very positive working relationships with government — and early engagement with the public and the project-area communities. We have a first-rate marketing team. And we have enjoyed strong support from government at all levels.
What all of this tells me is that Australia and the companies investing in its energy sector know how to work effectively in this arena. Of course, none of this means there are any guarantees out there for Australia's LNG sector. This is why I'm grateful to many of Australia's leaders who have worked hard to add energy exports to the nation's national economic tradition of reaching out to secure new trade.
I'm also grateful to the Australian Petroleum Production and Exploration Association Ltd. (APPEA) for its ongoing work to help keep the nation's oil and gas industry competitive and to work towards continuous improvement as well. I continue to believe strongly in APPEA's Australian Competitive Energy initiative to help suppliers of oil and gas services be globally competitive so that we can maximize Australia's share of business in developing energy projects.
I also am pleased that government and business are still guided by the LNG Action Agenda — created four years ago — which united them on the key policy settings required to expand Australia's LNG industry. I want to commend the APPEA team and everyone in our industry who continue to contribute to the policy debate in order to ensure our industry remains globally competitive.
The latest example is the "NatGas" policy agenda. It confronts the entire gas situation from domestic to global, not as a bundle of problems but as a package of future opportunities to keep attracting capital to Australia.
Let me ask you to look forward. Picture with me for a moment the future as we'd like to see it. Let's go eight or 10 years out.
The North West Shelf is now a five-train powerhouse and has delivered another wave of construction jobs, paychecks and new business for Australian companies. The Gorgon project is exporting LNG to North America, China and other Asian customers. Along with new exports, Gorgon is supplying gas to the domestic market in Western Australia. Gorgon's facilities to sequester carbon dioxide have established Australia as a leader in this vital technology to reduce carbon intensity. And Barrow Island's rare creatures, along with their habitat, remain fully protected with the new Gorgon facilities in place.
Again, we're only imagining the possibilities. But together, these projects could easily represent billions of dollars of export income and taxes and royalties and thousands of direct and indirect jobs in Australia. Because of these projects — plus Darwin's LNG development and, potentially, Sunrise and others — Australia's portfolio of international friends and trading partners will be deeper and stronger than ever before.
Because when it comes to important relationships, there's no trade partner like an energy trade partner. Australian resources will be fueling more power plants around the world, supporting economic growth, and helping to reduce both air pollution and greenhouse gas emissions. As the gas-export industry matures, Perth will earn full status as a world-class center of expertise in LNG. And on top of all that, Australia's LNG industry will still have the next 50 years to look forward to.
Is this vision of the future possible? You bet it is. But, there are no guarantees. However, I think you'll agree that Australia and its energy industry have many compelling reasons to make it all happen. And if we work together, I believe we will.
Updated: March 2004