Origin Energy Approves First Stage of $20 Billion APLNG Project  

Bloomberg reports that origin and Conoco have approved the first train the APLNG coal seam gas to LNG project - Conoco, Origin Approve First Stage of $20 Billion Project.

ConocoPhillips (COP), the third-largest U.S. oil company, and partner Origin Energy Ltd. (ORG) approved the first stage of a $20 billion liquefied natural gas project in Australia to supply the fuel to Asia.

Shipments from the first phase, estimated to cost $14 billion, are expected to begin in mid-2015, Sydney-based Origin said today in a statement. Total annual output capacity from stages one and two of the Australia Pacific LNG venture will be 9 million metric tons of LNG, the company said.

Conoco and Origin are among energy companies building Australian LNG ventures to tap rising Asian demand for less- polluting alternatives to coal. LNG prices are headed for a three-year high as Japan seeks additional shipments to replace nuclear capacity damaged by the March 11 earthquake and tsunami and China increases imports to boost power production.

“We believe the prospects of LNG markets have improved relative to six months ago,” Grant King, Origin’s managing director, said on a call with reporters. “Compared with 2009 and 2010, quite clearly demand for energy and the oil price remain more robust than people might have thought.” ...

Approval for the project follows the start of construction of rival coal seam gas-to-LNG ventures in Queensland state being built by BG Group Plc (BG/) and Santos Ltd. (STO) Adelaide-based Santos said in January its project in Queensland would cost $16 billion, while BG said in October it would invest $15 billion in its Australian LNG venture. The three Queensland ventures are using U.S. contractor Bechtel Corp.

From the moment Origin Energy and ConocoPhillips locked in China’s Sinopec as an equity participant and foundation customer, it was almost a foregone conclusion that their giant Australia Pacific LNG project would gain financial investment decision approval.

It is, nevertheless, a massive milestone in Origin’s history, in the development of the coal seam gas-fed export LNG industry in Queensland, and in the Australian export LNG sector more generally.

The first phase of the project – the first LNG train with a capacity to produce 4.5 million tonnes of LNG per annum – will cost $US14 billion but the APLNG partners are already marketing the gas they could produce from a second train with similar capacity.

A decision to go ahead with the construction of that second train, which would push the cost of the project up to $US20 billion, is likely to be made within six to nine months.

Origin is coy about the differing economics of a single train project versus one with two trains, but the $US14 billion initial commitment does include a significant component of costs related to the infrastructure to support a two-train project, which is why the second train is budgeted to cost only $US6 billion.

The group is adamant, however, that the economics of a $US14 billion single-train project would still deliver attractive rates of return well above its internal hurdle rates.

Despite the potential over-capitalisation of that first train in the unlikely event the second train is deferred or shelved, APLNG will support that train with its lowest-cost gas.

If the second train comes on stream, the consortium will need to access higher cost gas but will generate returns on the excess capital it is investing in the initial train in anticipation of the second, and it also expects to extract efficiency gains over time.

The other factor working in favour of the economics of the second train is that to attract Sinopec as the foundation customer – and the Sinopec contract accounts for almost all the production from the first train – APLNG would not only have had to offer an equity inducement (Sinopec is taking up a 15 per cent interest) but gas on relatively attractive terms.

While it is possible that APLNG will offer equity to larger customers for the second train’s output, it is unlikely that the equity on offer will be as significant as Sinopec was able to negotiate, that the terms will be as favourable or that the pricing of the LNG will be as attractive

APLNG should get a better yield from that production, which in any event is likely to be marketed to smaller customers and traders on a more opportunistic basis.

While there are now a host of new LNG projects under development in Australia, including three committed and another likely at Gladstone, the APLNG partners are convinced they will be getting their gas into the market at a period where there will be a considerable gap between uncontracted demand and then uncontracted supply available to meet that demand.

First gas from their plant is scheduled for mid-2015, with gas from the second train flowing in early 2016.

Royal Dutch Shell is in no rush to develop its LNG venture in Gladstone, under the belief that costs will decline after the current rush of LNG work in Queensland subsides, according to a report by the Australian Financial Review that quoted the company's chief executive, Peter Voser.