The man who was ignored about coal-seam LNG economics

COME back Don, all is forgiven! It is not something anyone has said yet, but as Slugcatcher was reading about Royal Dutch Shell’s likely dumping of the Arrow LNG project in Queensland he was reminded of the warnings from Don Voelte four years ago.
The man who was ignored about coal-seam LNG economics The man who was ignored about coal-seam LNG economics The man who was ignored about coal-seam LNG economics The man who was ignored about coal-seam LNG economics The man who was ignored about coal-seam LNG economics

ENB's infamous Slugcatcher

Tim Treadgold

“They’ll never work,” is what Voelte almost said when asked why the company he headed at the time, Woodside Petroleum, had declined invitations to get involved in the grand plans to convert coal seam methane into LNG.

A direct quote from one of Voelte’s critiques in 2009 is: “What are the economics of this lean gas?”

He said a lot more than that, but questioning the economic viability of LNG production based on the extraction of inland coal seam rich in methane but lacking valuable liquids was the key to his criticism.

Far more profitable, Voelte said, to focus on conventional methane such as that found in the huge deposits off Australia’s northwest coast.

At the time, Voelte’s opinion of the LNG industry evolving around the port of Gladstone was treated as sour grapes by people in the coal seam business who argued that Woodside had made a huge mistake by not getting involved in their budding industry.

There are not too many still holding that opinion today as they contemplate the likely withdrawal of Shell and partner PetroChina from the Arrow project after they have sunk around $8 billion in what seems to be a pointless exercise.

Nor would there be many people involved with the other coal seam LNG projects, the Santos-led Gladstone LNG development and the BG-led Queensland Curtis LNG venture, who would not like to be reminded of what Voelte said.

Cost overruns, construction delays and severely embarrassing questions about whether they have enough gas, or can deliver it in sufficient quantities to hit their liquefaction targets are starting to worry investors, banks and credit-rating agencies.

It is impossible for The Slug to say that everything predicted by Voelte in 2009 (and earlier) is coming true, but there is enough criticism surfacing to suggest that he was not far off the mark.

Shell’s second thoughts about the Arrow project is the latest example of the fresh thinking about coal seam gas and its suitability for conversion to LNG, especially at a time when oil prices look like stalling (or falling) thanks to rising worldwide production and sluggish demand for energy outside the US.

A few days before reports started to surface of Shell freezing work on the Arrow project and launching a wholesale staff retrenchment exercise one of the world’s leading investment banks, Credit Suisse, ripped into Santos over GLNG.

In a dramatic attack that ended with an investment downgrade of Santos, Credit Suisse said everyone involved in coal-seam LNG projects was discovering that they were a lot harder than first thought.

Using the grief and death management technique devised by the late Elisabeth Kubler-Ross, Credit Suisse, assessed the coal-seam problems in five stages, ranging from denial (it won’t happen), to anger, bargaining, depressions and, finally acceptance (yes, it really is that bad).

Denial, according to Credit Suisse, was seen at the point when final investment decisions on coal-seam LNG projects were being made because the owners believed they had fixed price construction contracts, world class contractors and had allowed for contingencies to manage risk.

Anger came as the cost overruns mounted. Bargaining is the stage reached today.

Depression lies ahead, especially over uncertainties such as the need to buy third-party gas (from Arrow, perhaps), before acceptance – by which time the share price of companies involved such as Santos will have retreated to more attractive levels.

The big issues for all coal-seam LNG projects are those Voelte warned about. A potential shortage of gas to meet export commitments without buying expensive third-party gas, and concern that higher-than-expected capital costs will meet lower-than-expected LNG prices to damage project economics.

Cold comfort it is, therefore, to hear more of what Voelte said in 2009, using this interview on the ABC’s Inside Business program of February 22, 2009:

Question: “Why hasn’t Woodside done anything about coal seam gas?”

Answer: “Well, there’s two reasons. Number one, we have a big portfolio of undeveloped gas ourselves from what you might call more conventional gas resources in WA and in the Timor Sea.

“Number two is that we’ve taken a look at the prices other people view that [CSG] to be worth. We know the issues, with literally thousands of wells that have to be drilled to produce a feed into the plants, the plants aren’t any trick at all, those are not easy to build. It’s onshore, there’s a lot of water issues, there’s lots of distribution.

“I think there are going to be plants built there but I think there’re going to be a large consolidation. There will probably be two projects that get off. I just don’t believe there could be four, five, six or seven projects, it won’t support that kind of feed.”

Don Voelte 1. Royal Dutch Shell 0.

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