AGL passes milestone on LNG imports
Summary: The old pipeliner in Mick McCormack delights in the gentle irony that AGL's quest to manufacture a virtual pipeline to feed its gas customers in Victoria will be made readily investible by his readiness to throw $200 million at the task of building a more traditional cross-country artery.....
A pipeline development and transport agreement with McCormack's APA stands as one of two key project milestones AGL stepped past on Tuesday as it works towards fulfilment of its plan to import liquefied natural gas into Crib Point in Victoria's Western Port.
The other box ticked by the AGL manager that owns the Crib Point project, general manager energy supply and origination, Phaedra Deckart, was a collection of agreements with the Port of Hastings that will underpin remediation work on the Crib Point Jetty Berth No. 2.
If the local traffic interruption notifications issued by port management are any guide, then the jetty is a repair job already in progress. And certainly McCormack's people are well into working out a pathway for the pipeline APA will build that might eventually link APA's proposed re-gas plant to the gentailer's Victorian retail and commercial gas customers.
AGL plans to invest upwards of $250 million on parking a floating storage and regasification unit (FSRU) at Crib Point so that the company can import better than 130 petajoules (PJ) of gas into Victoria. To put that volume into some sort of context, it represents more than half of Victoria's current annual gas demand.
The gas would arrive in the form of liquid natural gas and the facility would be capable of storing to 3.5PJ of gas at any one time while the pipeline link that McCormack plans to build would link the terminal to both AGL customers and the company's very big Iona storage facility.
The ability to store large amounts of gas provides AGL with the ability to acquire its LNG feed opportunistically.
The next steps for Deckart will be to secure the regas vessel AGL needs to park at Crib Point and then to lock in firm supply agreements for the gas that will fill that big boat.
AGL has issued a request for proposals for both the regas facility and the gas supply it needs and Deckart says the response from both infrastructure and raw materials suppliers has been "enthusiastic". AGL is working through shortlisted options and expects to negotiate agreements over the next six months that match the conditional certainty of the APA and Port of Hastings deals.
To be clear here, both the arrangements – onshore pipeline and port arrangements – confirmed on Tuesday are conditional on the final investment decision that AGL has targeted for next year.
Mind you, both those agreements arrive with a level of financial obligation. In its Tuesday statement AGL noted that arrangements triggered obligations of up to $65 million even should the project not proceed. AGL noted, too, that this was in addition to the $37 million that has so far been committed to the project.
The maths of those obligations would suggest that a final investment decision (FID) is more likely than not. AGL would seem to have committed to spend $102 million or nearly 40 per cent of the initially estimated capital cost of the whole project.
When Deckart first arrived at LNG imports as a solution to Victoria's accelerating drift from energy self-sufficiency to gas shortage and power vulnerability, the idea seemed novel in its paradox.
For generations the Victorian economy has been delivered competitive advantage by its access to cheap and proximate energy. And through the supply-side trials triggered by the coincident arrival of three gas export facilities at Gladstone, Victoria has been the swing producer that filled the gas gaps up and down the east coast.
But the comfortable days of gas self-sufficiency are just about done. According to the March update on the state of Victorian gas supply by Australian Energy Market Operator (AEMO), the state will be in deficit by as early as the daytime winter demand peaks of 2021.
Victoria's gas production peaked at 435PJ as recently as 2017, which is equivalent to about two thirds of the east coast demand before the LNG plants to the north were turned on. Just under half that production was exported to other east coast markets, with the lion's share of the non-Victorian volumes landing in NSW.
But AEMO says Victorian production will fall by 57 per cent to 187PJ by 2022. Given there is no erosion of underlying demand or the arrival of unanticipated new supply, then Victoria risks being under-supplied by 19PJ, while customers in NSW and Queensland will need to find another 200PJ.
All of that serves to explain why the novelty of the AGL solution has worn off. There are two and maybe three plans to fill looming gas voids with imported LNG.
Andrew Forrest and two Japanese industrial giants, JERA and Marubeni, have invested their reputations and a good deal of capital on a plan to import up to 150PJ of gas to the NSW market through an FSRU moored at Port Kembla.
Just last week Australian Industrial Energy revealed through The Australian Financial Review that it had signed 12 major commercial gas users ahead of confirmation that Port Kembla has won the race to host the venture's landing terminal. The AIE venture is also contemplating a range of power generation options, a strategy that earned firmed affirmation with last week's supply shortfalls in NSW that were triggered by a concert of generation outages.
Like everything Forrest, AIE's is a proponent in a hurry and, before heading off to Singapore in search of an FSRU, management indicated a desire to hit FID in 2018, with Forrest expressing a desire for first gas by late 2019.
The third runner in the LNG import race is a Mitsubishi-backed plan to import a up to 100PJ of LNG into Adelaide through the outer harbour Pelican Point and use a good portion of it to fuel a new network firming power plant.
According to energy market analysts EnergyQuest, there are "also rumours that ExxonMobil is working on an LNG import project". Certainly Exxon has every advantage in pursuing such an option, that its rapidly emptying Bass Strait gas fields would be perfect places to store big gas and they are already connected to the long-established Victorian pipeline network. Exxon is also an owner of the massive Gorgon LNG project, so it has ready access to gas.
What all of this activity points to, outside of the dire state of gas supply in Victoria and NSW, is a profound reformation of the seaborne LNG trade. Not quite a decade ago a very smart guy, then BHP chief executive Marius Kloppers, told me to expect an end to the point-to-point, long-term contract trade in LNG.
Kloppers predicted there would be two tipping points that would drive the shift to transparent short pricing that would see gas increasingly priced on its fundamentals rather than those of oil.
First, the spot price would run at an extended discount to the contract price and there would be a market changing spike in number of regasification terminals across North Asia and the subcontinent. Kloppers said the spot discount would encourage Japanese buyers to seek changes to the binding terms of their long-term, oil priced contracts while the regas plants would send the demand and price signals enough to encourage producers to confidently embrace shorter-term markets.
This, and a good deal more, is what has happened in global LNG markets.
The US has entered the LNG business and its pioneers are infrastructure players who simply buy the gas they need from the domestic market at a Henry Hub price that sits at a permanent discount to the equivalent LNG price.
As a result, AGL's Deckart has "the full gamut" of supply options to contemplate as she works to secure a cheap and reliable gas supply. "We are talking to global producers, portfolio players and to traders. We have the full gamut of offers available to us," she said. And that gamut includes both term and pricing metrics of any supply contracts.
Rio's new man
Rio Tinto has locked onto a replacement for Chris Lynch and the biggest surprise is that the winner is a bloke. And that is really saying something.
Rio's new CFO will be Jakob Stausholm, whose last job was chief financial strategy and transformation officer at the Danish container shipping king Maersk.
Stausholm is Danish, Shell trained and spent two years at Woodside a decade ago.
And the reason why his gender is a surprise? Well, there was some expectation internally that chief executive Jean-Sebastien Jacques was keen to appoint a woman in the name of his drive for diversity.
Stausholm will start on September 3, which means that Lynch will be free to hang up his first class flying suit in time for the opening contests of the AFL football finals. Good news indeed.