Slugcatcher: The stars align for a new gas export project – ENB

Slugcatcher: The stars align for a new gas export project

IF anyone needs an example of the difference between east and west Australia Slugcatcher suggests a look at the business of gas with the east wanting to limit exports while in the west a new gas export business is emerging.

Energy buyers in Sydney and Melbourne will not be amused to hear about the plans of Mineral Resources, 80% owner of the Lockyer Deep discovery north of Perth, which looks like it has enough gas to meet local demand as well as fill LNG export orders.

But if they're clients of Citi, an investment bank, they can read all about it in a research report published last week which mounts a strong case for Mineral Resources winning government export approval.

The appeal of exports boils down to the international gas price being six-times higher than the domestic price (US$40 a gigajoule v US$6/GJ, according to Citi) while the other issue is that there is no easy way to transport gas from the west coast to the east.

But there is another point about Lockyer Deep and it's one primarily aimed at politicians who want to limit gas exports, and that's the importance of exploration which is encouraged in the west and discouraged in the east.

Rather than looking for ways to increase the amount of gas available, which is the obvious solution to a shortage of anything, the daft plan in the east is to put a cap on the domestic price to help industry and households with high power bills - until the gas runs out.

Over time, as even a primary school student can tell you, a limit on price will inevitably lead to a reduction in supply because the incentive to discover and develop is removed - though that might actually be the hidden agenda of politicians who have put all their eggs in the renewables basket.

Since earlier this year when Mineral Resources and Norwest Energy, the junior partner in Lockyer Deep, ran their first flow test to demonstrate the potential of the discovery, there has been speculation about the gasfield being big enough to support an export phase.

But with increasing anger over Australia's self-inflicted east coast gas shortage calls have been growing louder for the Western Australian gas to be shipped east - just don't ask how.

Citi, for the first time, has wrapped some dollar numbers around Lockyer Deep, as well as explaining why export permission is more likely than some people realise.

For starters, the discovery is big at an estimated 1.12 trillion cubic feet and could get bigger as exploration continues to establish the exact dimensions of Lockyer Deep itself and other targets in the region which is home to the giant but exhausted Dongara gas field, and the emerging Waitsia and West Erregulla gasfields 15 kilometres to the southwest.

Pre-production capital expenditure is costed by the bank at a relatively modest A$900 million and operating cost at $1.20 per gigajoule (versus a Mineral Resources target of $1/GJ).

The project could add $500 million a year to the company's pre-tax profits with the overall value of Lockyer Deep estimated to be $1 billion.

Citi's view on LNG exports is that: "given the size of the project, we see an exemption as plausible," adding that a domestic only gas project, which would depend on the relatively small west coast gas market, would be more challenging.

Critical to the possible export phase of Lockyer Deep is the permission granted to Mitsui and Beach to convert a portion of their Waitsia gas into LNG via a processing agreement with the North West Shelf project.

Citi's case in support of Lockyer Deep LNG exports hinges on two key factors.

Firstly, that "the North West Shelf has plenty of spare capacity and needs new supply to prevent train curtailments," and secondly that "the WA domestic gas market could be in surplus from 2025 if new Perth Basin projects come on line, which bodes well for exceptional export approval."

The bank said there were no doubts about the commitment of Mineral Resources to developing Lockyer Deep, which started as an investment in sourcing its own gas supply to get greater control of energy costs over its mining interests (iron ore and lithium).

From a standing start little more than a year ago the company's gas business has grown to around 50 employees who are working on the next phase of drilling which is expected to start next month on the North Erregulla target followed by Lockyer Deep-2, with each 4400 metre well expected to take around 60 days to drill,

Citi lists seven reasons supporting the case for developing Lockyer Deep and three possible risks possibly affecting development.

The positive are:

• Tight WA gas supply in the near term and a government commitment to phase out coal-fired power by 2030.
• A big resource base which could get bigger.
• High flow rates in testing.
• High methane content in the gas.
• Lower emissions intensity than offshore gas fields.
• Spare LNG capacity at the North West Shelf, and
• Low development costs and the benefit of proximity to existing infrastructure. The risks are:
• Uncertain commercial term and no guarantee of getting LNG export approval.
• Geological risks, and
• Permitting risks, including landholder and environmental approval.

Unsaid is the potential for east coast blowback and a national bun fight should WA grant approval for a new LNG export project as an east coast gas shortage worsens.

The politics of Lockyer Deep could even see the Australian government intervene, overruling a decision by the WA government despite the two governments having roots in the same Labor Party.

Let the Lockyer Deep fun and games commence!