On Keeping Warm  

Tom Whipple's latest article in the Falls Church News Press takes a look at the natural gas situation in the US. He doesn't mention the huge LNG deal signed with Dubai, which would seem, to me anyway, to mean that the situation isn't quite as dire as he paints it (assuming the US$ holds up and a larger scale war or revolution doesn't break out in the middle east).

If you heat with natural gas, you must have noticed the price has been going up lately. Well, I have some bad news for you -- this is only the beginning. For the 62 million households heating with natural gas in the United States , the cost of home heating has doubled in the last few years and there is no end in sight.

Unlike the situation with oil and oil products, only a minimal amount of natural gas — around 2 percent of total consumption— is being brought to America in liquefied form by LNG tankers. Currently 83 percent of our consumption comes from our own gas wells and 15 percent comes by pipeline from Canada . The problem is that our domestic production is declining, the Canadians are becoming antsy about sending so much of a valuable resource to the US , and we are going to have to compete with an increasingly desperate world for cargos of liquefied gas.

There are some bright spots. There is talk of a pipeline to Alaska and more LNG compression plants are being built overseas, but these will take years to complete and will only ease the pain a bit, not solve the coming supply crunch. Although we continue to find new pockets of natural gas in the US , those that are being found are smaller and much more expensive to drill. The bottom line is that US natural gas consumption will drop one way or another. We will have rationing by price and there is little anybody can do about it.

In the wake of Three-Mile Island nuclear accident and growing concerns about air pollution, the US started building gas fired generating plants at a rapid pace. Currently 17 percent of our electricity is being generated by natural gas. Consumption by electric power plants nearly doubled in the last 15 years and over 25 percent of our annual natural gas consumption is used to make electricity. As matter of interest, only about 6 percent of the electricity used here in Virginia is generated by natural gas and is brought online only when needed to meet peak demand.

Gas for making electricity, however, is a problem that ultimately will take care of itself. As the cost of generating power by natural gas goes beyond the cost of other sources of energy, the power companies will switch to cheaper sources of fuel where possible, or pass on the increased costs to customers where they can't. This, in turn, will encourage serious conservation efforts so the net result will be less and less natural gas going to fire generating stations.

Woodside has announced a new strategy to try and get approval to deliver LNG to California called "OceanWay". Yesterday's TV news report made this sound like a done deal, though press reports were a little more realistic. There were earlier reports about the Bush administration working to " clear final barriers for the sale of Australian liquefied natural gas (LNG) to the US by the end of the decade".

Woodside, which abandoned a partnership with a US company to build a $US300 million ($400 million) offshore terminal on an old oil platform last year, now plans to convert its LNG to gas on a dedicated ship.

Rival BHP Billiton's $US600 million plan for the same market, Cabrillo Port, would instead use a floating terminal to heat the gas before sending it to shore via a pipeline.

BHP's plan has already faced several delays and fierce opposition from sceptical environmentalists but Woodside believes its bid to supply about 10 per cent of California's natural gas is environmentally superior and will ultimately succeed.

Chief executive Don Voelte and North American LNG director Jane Cutler met politicians and held a media conference yesterday in the state's capital, Sacramento, to announce the "OceanWay" plan.

The development timeline, location and cost of the project were not revealed yesterday but are expected to be made public next month. The company said the timeline would depend on whether the LNG was supplied by Woodside's Pluto field or its Browse field but OceanWay is unlikely to be active before 2010.

"The cost is not the major consideration here," Ms Cutler told the Herald yesterday. "What's really important is a contract that minimises the impact on the environment, addressing the concerns Californians have about permanent features … and LNG in close proximity to population centres."

Along with Woodside and BHP, several other companies have proposed building import terminals in California, although none has received final approval. Billions of dollars of gas exports are at stake and Ms Cutler said the market would probably support two terminals at most.

Woodside's advantage in gaining approval, she said, would be its solid track record of safely making more than 2000 LNG deliveries from the North-West Shelf project it operates in Western Australia.

Woodside has also been in the press over its expanding operations in Libya.

Woodside Petroleum Ltd is due to drill the first exploration well next month in a 194 mln usd hunt for oil beneath the desert sands and gulf waters of Libya, The Age newspaper reported citing company sources.

Libya had been off limits to Western companies due to sanctions imposed by the US and the United Nations in the 1980s and 1990s in response to terrorist activities.

The newspaper said Woodside, 34 pct owned by Royal Dutch Shell, is among the first back into the country, known for its big oilfields, following the sanctions being lifted in 2003.

It said Woodside's first exploration well is due to start late next month in a rapid-fire six-well program in the onshore Murzuq Basin, 1500 km south-west of Tripoli.

A separate seven well program will also be drilled in the onshore portion of the Sirte Basin on the other side of the country. Woodside is a 45 pct partner and operator with Repsol and Hellenic Petroleum.

The Age said Woodside has yet to detail the size of the oil targets it has identified beneath the Sahara's sand dunes, but its permits in the Murzuq and Sirte basins are very much in "elephant" country in oilfield terms.

There have also been reports of possible problems in Mauritania for Woodside (and ROC and Hardman) due to some potential untowardness of their relationship with the ex-energy minister.

Australia's biggest oil producer Woodside Petroleum Ltd is confident that the rumoured detention of Mauritania's former energy minister will not affect its operations in that country.

Woodside on Wednesday confirmed that its Chinguetti oil project, which is located off the Mauritanian coast, was still on track to produce its first oil next month.

Other exploration and development activities were also unaffected by the discussions, the company added.

Local media reports have speculated that the former Mauritanian minister for energy and petroleum has been detained in connection with agreements signed with foreign companies.

Woodside is at least partially responsible for the booming WA economy (and out of control Perth property market) - my visit over Xmas reminded me a bit of the tech boom (in a dry and dusty way) with oil and gas engineers all happily rolling in money and talking about setting up their own oil services companies.

Talk around town indicated that Woodside are planning on hiring 1200 people this year (which I imagine translates to a whole lot of hiring in the local - and offshore - service companies that do most of the actual work). The Pluto project already looks likely to go ahead and there seemed to be a lot of confidence that customers for gas from the Browse field will also be signed up in the next couple of months.

Presumably Pluto gas will end up being handled at the existing LNG plant at the Burrup that handles North West Shelf gas (via 2 new LNG trains). As I understand it design has begun and construction is expected to start in 2007 and will get up and running in 2010.

Browse, on the other hand, is far away from Karratha. One engineer I talked said the project would be similar in size to the North West Shelf. There is some speculation that an LNG plant in the Broome / Derby area won't get the go ahead, and that instead the gas would be piped undersea to Darwin (a rather large distance away) for processing there. (I'm not sure if he meant in the existing Conoco Philips LNG plant or if a new one would be built).

There was also some talk of a smaller field closer to Darwin in Australian waters being developed and the gas piped to Darwin, but I didn't catch the name and haven't noticed any press on this one.

The Sunrise project in the Timor sea is on hold despite a deal finally being agreed between Australia and East Timor over sharing of revenue from fields in the disputed area.

Having a lot of existing LNG plants in Darwin would no doubt make it much harder for any plant to be built in East Timor to process gas from Sunrise once the project finally goes ahead.

I also asked about Woodside's expansion in the Gulf of Mexico - no one seemed particularly concerned about hurricanes - and one person quipped that the GOM will run out of oil within 10 years anyway.

One final note on gas, AGL has signed a deal with Oil Search and ExxonMobil's PNG gas project which makes it seem very likely this will go ahead (and one Sydney firm will get to see a naked stockbroker running around the floor).

Changing the subject back to Darwin, I read an interesting article in "The Monthly" recently called "Lilypad of the Arafura" which looked at the evolution of Darwin from frontier town to somewhat bland northern city (which one resident described as "Canberra with palms"). The article talked a lot about the development of gas fields in the Timor Sea and the potential for Darwin to become the Australian equivalent of Aberdeen. It also looked at the build up of the defence forces in the area, with a lot of our operational capacity moving up from the south and leaving just the administrative functions back in the south.

The author pointed out that while the presence of the Navy and Air Force up there makes a lot of sense, its not quite as easy to understand why the Army is putting Abrams tanks up there, especially given that (1) we don't have any equipment capable of transporting them and (2) the terrain in nearby regions isn't exactly suitable for their use. He speculates that they are there for joint training exercises with US forces, who would then transport them to areas where they may be need, such as Iran. He also speculates that we are likely to see an American base in the Darwin area before too long - the "lilypad" of the Arafura sea.