On a warm evening in late February, on an island just off the coast of eastern Australia, workers started to pour the concrete roof of an enormous liquefied natural gas tank that stretches 90 metres in circumference and rises 10 storeys into the sky.
The workers toil away late at night to avoid the searing heat of Australia’s late summer sun. They had recently built the roof for an identical adjacent container, both part of the $24.7-billion Australian ($25.5-billion Canadian) joint venture Australia Pacific LNG, owned by American oil and gas firm ConocoPhillips Co., Australian energy giant Origin and China’s state-owned Sinopec.
The two enormous tanks will hold natural gas tapped from the deep coal beds further inland and piped hundreds of kilometres to the LNG export terminal on Queensland’s Curtis Island. Facing the sheltered harbour of the industrial port city of Gladstone, the gas will be chilled until it condenses to one-six-hundredth of its original size – essentially from the size of a beach ball down to a table tennis ball – making it possible to load the liquid gas onto LNG carriers with enormous domed tanks and ship it off to the surging economies of Asia.
“I don’t know how many cranes we have out there, but it’s a bunch,” says Kent Anderson, ConocoPhillips’ project manager for Australia Pacific LNG. “It’s a good clean fuel and it just seems the world can’t get enough of it at the moment.”
The world is undergoing an LNG boom, and Australia is at the epicentre. Right next door to Australia Pacific LNG’s 3,600 workers on Curtis Island is a similar-sized, $20.4-billion (U.S.) LNG export terminal under construction for a project led by British-based BG Group. And next door to that is yet another project run by Australian energy firm Santos, worth about $18.5-billion. Remarkably, construction might begin on a fourth LNG project next to that one if Royal Dutch Shell PLC decides – amid global restructuring and approvals – to push ahead with it.
All of these huge Australian projects have long-term sales contracts with massive Asian firms such as Korea Gas Corp., Malaysia’s Petronas, Japan’s Kansai Electric and China National Offshore Oil Corp. (CNOOC).
Half a world away, meanwhile, there are bold plans to make Canada an LNG powerhouse, targeting many of the same Asian firms as customers. But Australia’s huge head start and the massive scope of its LNG projects - despite major cost overruns - threaten Canada’s success as it jumps into a global industry that promises to be intensely competitive.
Canada, or more specifically British Columbia, will be lucky to have three LNG export terminals by the end of the decade. Australia, on the other hand, has three LNG export terminals nearing completion in the small port city of Gladstone alone – and this is just one small corner of a surging Australian gas export sector that will likely help the country overtake Qatar as the world’s leading LNG exporter.
There is a lot of promise in British Columbia but relatively little happening on the ground. There are at least 14 B.C. LNG projects planned, but industry experts caution that launching just one project will be a major challenge. With B.C.’s delayed tax regime, environmental assessments, a lack of local infrastructure and complicated negotiations with First Nations, it remains unclear how many companies will stick it out. No final investment decisions have been made yet to build LNG projects on Canada’s Asia-facing West Coast.
LNG projects require massive levels of investment and each delay increases the likelihood of being squeezed out due to a looming gush of global gas supplies scheduled for 2018 and 2019. Companies will be facing pressure this year to make final investment decisions or miss the chance to export B.C. LNG.
Nevertheless, B.C. Premier Christy Clark and her provincial Liberal government hope LNG projects could pump $1-trillion (Canadian) into the economy over three decades, helping generate 39,000 construction jobs, as well as tens of thousands of other LNG-related positions.
Of the planned projects, Pacific NorthWest LNG project, headed by Malaysia’s state-owned Petronas, is the most likely to proceed to construction on Lelu Island near Prince Rupert. Another promising project is Kitimat LNG, owned by the Canadian units of Chevron Corp. and Apache Corp.
B.C. Natural Gas Development Minister Rich Coleman says other players remain committed, even if their projects aren’t as advanced, but warns that B.C.’s window of opportunity will close in the next five to seven years.
While some LNG proponents have urged the B.C. government to speed up its timetable for finalizing tax rules, Mr. Coleman is confident that tabling legislation this fall for the LNG tax regime will provide enough detail for projects to make their plans accordingly. “The LNG proponents want to know that they have a stable marketplace where they can nail down their numbers for the long term and compete worldwide on the investment they want to make,” he says.
But for now, global LNG players have headed straight for Australia while Canada remains on the back burner.
Located about an hour’s flight north of Brisbane, Gladstone is no stranger to industry: It has been shipping goods to Asia for more than century.
Today, Gladstone has a population just over 62,000 and exports bauxite, aluminum and grain. For visitors, the first sign Gladstone is going through an energy rush comes at the airport. The lone baggage carousel is dwarfed by large advertisements for workers’ compensation lawyers and scaffolding firms.
On Goondoon Street, the main drag, there are other signs that this is more than just a sleepy town.
There are the large, gleaming, cheerily staffed community outreach centres with displays, pamphlets and maps that seek to soothe the community’s nerves. Stretched out along the small strip, there are separate buildings for the Santos-led Gladstone LNG venture, Australia Pacific LNG, BG Group-led Queensland Curtis LNG and another one for Shell.
The centres explain how LNG is better for the environment than other fossil fuels, show the safe double hulls of the LNG carriers and explain the fracking-style drilling that happens further inland. Hydraulic fracturing has created unease among Australia’s cattle farmers, who fear their wells will be soiled by natural gas.
Almost everyone walking the streets, sitting in the restaurants or driving Toyota Hilux pickup trucks wears yellow fluorescent clothing. This is the “fluoro army” building Gladstone’s LNG industry, a smattering of the 13,000 people who work on Curtis Island. Thousands go back and forth on huge ferries every morning and afternoon. They are so ubiquitous they even made an appearance as “high-vis zombies” in a musical performed by the waterside. “It was called Boomtown,” says Shane McLeod, a local real estate agent.
In the Santos building, marine and stakeholder manager Garry Scanlon leans over a diorama of the harbour and describes the effort that goes into building three separate LNG export terminals, all in the same place, all at the same time. The Gladstone port, which is already a big hub for coal exports, used to see on average 10,000 small ship movements within the harbour each year, he says. With each company now operating separate ferries and large vessels to move enormous LNG equipment prefabricated in Indonesia and the Philippines, that number has soared to 32,000 ship movements per month. “It’s something you won’t see again,” he says.
The pace of development is so great the city has even attracted a foreign anthropologist who studies boomtowns.
“I’m interested in local responses to accelerated change,” says Thomas Eriksen of the University of Oslo. “There’s an upside and downside to everything.”
Australia’s head start
Gladstone, as impressive as its three LNG terminals seem in comparison with Canada, is just one part of Australia’s broader LNG industry.
Elsewhere in the country, Australia already has three functioning LNG terminals. Including Gladstone’s projects, there are a total of seven projects under construction, some of which could start shipping LNG in late 2014 or in 2015.
Several projects either under construction or proposed are located thousands of kilometres away in Western Australia. Darwin in the country’s Northern Territory is another busy LNG site. These projects range from traditional offshore sites to the innovative “floating” LNG terminal being built by Shell. The gargantuan Gorgon project off the western coast is now estimated to cost a whopping $54-billion (U.S.).
Given the large number of projects, observers predict Australia will easily overtake Malaysia’s LNG output soon and then push past Qatar to become the world’s largest LNG exporter by 2018.
Lodged in the Asia-Pacific region, close to key Asian buyers, Australia also enjoys a geographic advantage over Canada.
However, the whopping $54-billion price tag on the Chevron-led Gorgon project, which has soared by 40 per cent since the original estimates, shows LNG infrastructure can be painfully costly.
High commodity prices in recent years flooded Australia with investment and drove up the Australian dollar while construction materials and labour costs soared.
The BG Group-led $20.4-billion QCLNG project at first was projected to cost $15-billion. Firms in Australia will need to cut costs if they want to remain competitive, particularly as the United States and Canada plow into LNG.
“Australia has a permanent shipping advantage to these markets because it is physically closer, but it is hampered by the highest costs in the world and some of the lowest productivity,” says Geoffrey Cann, who heads Deloitte Australia’s oil and gas consultancy out of Brisbane. “The shipping advantage is not much. You can chew through it in a hurry.”
But even with high costs and low productivity, which could be damaging if global LNG prices drop in years ahead, Australian projects have a distinct advantage because of the head start. By 2015, many of these LNG projects will be operating with two “trains,” or separate LNG cooling processes, but most LNG sites are approved for three or four production trains. Western Australia’s $50-billion North West Shelf Venture (Woodside, BHP Billiton, BP PLC and others) already has five trains.
Expanding facilities is much cheaper than building new ones. That means Australian projects – with land already cleared, and jetties and storage tanks already built – will be fighting for sales contracts in Asia against brand new Canadian projects that have much higher startup costs.
“If they decided to expand the plants at the exact time that Canadian projects are trying to find buyers, they will absolutely compete,” Mr. Cann says. “And it’s much cheaper to expand than to find new buyers. This is why it’s a bit of a foot race.”
Mr. Cann suggests Canada’s legislators could also learn from mistakes made already in Australia, where companies pursuing similar projects have duplicated infrastructure such as pipelines unnecessarily.
He also suggests firms looking at projects in Canada consider more advanced technology, such as Shell’s massive, 488-metre-long floating LNG terminal Prelude.
Industry experts say there will be pressure for B.C. LNG projects to consolidate. Petronas, for instance, has held talks with BG Group to combine forces to build one pipeline from northeastern British Columbia to the coast instead of two.
It is late afternoon on Goodoon Street when two members of the “fluoro army” swagger into the middle of the road and yell suggestively at a group of three women standing on the corner. “You got to see it first hand,” Anita Street sighs. She and her friends describe a boomtown that has become increasingly hostile to women as workers flooded in for LNG projects. The women said they no longer go to clubs or bars any more because they get grabbed, and even while shopping in grocery stores they are ogled, hit on and heckled. “I have a son and they still do it,” Ms. Street says.
Gladstone has weathered booms and busts before, but the sheer scale of the race in the global LNG industry has strained the city and the environment on a number of levels – as well as relationships with aboriginal groups, farmers and fishermen.
Mr. McLeod, the real estate agent, describes an increase in drug use, drunken fights and public urination downtown. Rents on some properties doubled or tripled quickly, to the point where the town opened nearby showgrounds so locals driven out of the housing market could live in RVs. Firms responded by building new houses and apartments, which in turn led to an oversupply of housing, and prices have fallen. “I’m born and bred local,” Mr. McLeod says. “It’s probably the largest boom we’ve seen.”
There have also been concerns about harm to the natural environment in and around Gladstone, which is near the Great Barrier Reef. Fish have been showing up in the harbour with lesions and infected eyes. Some dolphins have washed up dead, while others seem to have been driven far away from the harbour by the increased levels of noise.
There was also a scandal when millions of tonnes of dirty silt dredged up from the long-time industrial port – partly because of the LNG projects – leaked out of a thin enclosure meant to isolate it from the ocean. One government investigation, however, found no links between specific harbour activities and what was happening to wildlife.
It is still a glimpse at the type of concerns that are likely to arise when monumental projects take place in marine environments. Unlike some parts of the rugged B.C. coast, Gladstone already has a proud industrial history. Some locals feel the LNG companies have been good corporate citizens, but Mr. Eriksen, the anthropologist, suggests that the industry-driven growth has allowed the state government to pull back funding, leaving the city reliant on corporate largesse.
“They use engagement for marketing,” Prof. Eriksen says, “but don’t upgrade the roads.”
LNG companies, however, did contribute $10.5-million to the airport.
One other explanation for firms’ ability to push ahead in Australia is that rights for aboriginals are less entrenched than on Canada’s West Coast, where failure to consult with affected groups can result in legal challenges and costly delays.
Interactions between resource firms and aboriginal groups in Australia are governed by Indigenous Land Use Agreements, but vary greatly depending on the project, industry and particular companies’ desperation to get the project done. There is little obligation for much public disclosure.
In Queensland, LNG companies went the route of coal companies before them, favouring upfront payments, or fixed annual payments, to aboriginal groups rather than payments based on a percentage of proceeds. But there are indications that the cost of coal-seam gas pipelines, which is generally an upfront payment on a per-kilometre basis, has risen sharply in recent years as the LNG companies race to get projects completed.
Wally Ingra, a community elder who has worked in the energy construction business for decades, says aboriginal groups elsewhere in Australia have had more success than local groups around Gladstone. “They’re making massive amounts of money and nothing comes back into the community,” he says. “They’ll give us a sporting day. Oh, great. A sporting day.”
In British Columbia, some aboriginal groups have already endorsed LNG exports, as long as projects meet or exceed environmental standards. Still, opposition remains. For instance, members of the Blueberry River First Nations are upset because they have been unable to persuade the provincial government to protect 80,000 hectares of land from LNG-related drilling for natural gas in northeastern B.C.
Besides the global competition from Australia, British Columbia is in a continental race to export LNG.
B.C. LNG projects face a disadvantage compared with U.S. proposals that have a head start because some infrastructure is already in place, notably those in the U.S. South, near the Gulf of Mexico. In some instances, it will be a matter of converting American facilities originally designed to handle LNG imports so that they are instead reconfigured for exports.
Mr. Coleman, B.C.’s Deputy Premier who is in charge of the LNG file, says he recognizes the high stakes amid competitive pressures from Australia and the United States.
“LNG projects did their own thing in Australia and they found that costs got out of hand. Companies have learned that they don’t want that to happen in Canada, so there will be discussions here about how they can share certain things,” he says. “Our job is to make sure we’re globally competitive, which we are.”
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