05-08-03 Oil majors ChevronTexaco and Shell are lining up their Australian Gorgon gas field as a supplier to the energy-hungry US in what is a boost for the long-stalled A$ 6 bn LNG project. ChevronTexaco and Shell combined have conditionally agreed to negotiate terms for taking at least 4 mm tons of Gorgon LNG a year from 2008 to supply their proposed LNG import terminals in the US and Mexico. If the agreements translate into firm sales contracts, they could be enough to underwrite an initial 5 mm-tpy LNG development, Gorgon General Manager Paul Oen told.
US Federal Reserve Chairman Alan Greenspan recently warned that the US needs to import more LNG to keep pace with growing demand. Lately, North American natural gas supplies have flattened, causing prices there to roughly double.

Gorgon, long derided as a uncompetitive project, now appears to have stolen a march on Woodside Petroleum's rival Greater Sunrise LNG project in the Timor Sea. Woodside and its partners in Sunrise, ConocoPhillips and Shell, are targeting the same markets as Gorgon but have yet to agree between themselves on a final development plan. However, the big hurdle for Gorgon remains winning environmental approval for its controversial plan to site the proposed LNG plant on nearby Barrow Island, which happens to be a nature reserve.
Without Barrow Island the economics of the project don't stack up. "Barrow Island is critical to making Gorgon a competitive project," Gorgon's Oen said. The island is situated off Australia's northwest, roughly half way between the mainland and the Gorgon field, which lies some 130 km offshore. Building the LNG plant on the island would save the project around A$ 1 bn.
Without Barrow Island, Gorgon is just too expensive to develop, partly because the Gorgon gas is "dry" gas, lacking the associated gas liquids that other projects produce and sell as gas condensate. In addition, the Gorgon gas comes with large quantities of carbon dioxide, which Gorgon is proposing to sequester in saline reservoirs.
In the past these challenges had proved too much as repeated attempts to develop a project stalled, most recently in the 1990s just before the Asian financial crisis. But using Barrow Island makes the project viable, subject to environmental approval.

Last month both the Environmental Protection Authority and the Conservation Commission advised the Western Australian state government that putting an LNG plant on Barrow Island isn't compatible with the island's environmental and conservation values. But the government has to weigh that against estimates the Gorgon project would contribute A$ 21 bn to Australia's gross domestic product in the period to 2030, with exports being boosted by A$ 9.1 bn.
In Gorgon's favour, ChevronTexaco operates a small, long-established, oil operation on Barrow Island and hopes its environmental record will hold it in good stead. The date for public submissions on the Barrow Island proposal close Aug. 12 and Gorgon's Oen would expect the government to make a decision within weeks of that date.
"We can't predict the outcome, but we are confident of the process and all the relevant information will be presented to cabinet during August," Oen said.

Discovered 30 years ago, the Gorgon field hosts 12.9 tcf of proven reserves, with the larger field area believed to hold in excess of 40 tcf. ChevronTexaco has a 4/7th interest in the project and is partnered by Shell with a 2/7th interest and ExxonMobil with a 1/7th interest.
Pending environmental approval and sales contracts, the Gorgon partners expect to be in a position to make a go ahead decision in 2005. Under a stage-two expansion, ChevronTexaco plans to double the size of the Barrow Island LNG plant to 10 mm tpy and pump around 300 TeraJoules of gas to the Western Australian mainland. Including stage two, the total cost of project would be around A$ 11 bn.

Gorgon's Oen said that while the ChevronTexaco and Shell agreements increase the likelihood of the project going ahead, the partners are continuing to also target markets in Asia where the large number of LNG projects is making competition fierce. But Oen thinks the ChevronTexaco and Shell agreements send a positive message to customers.
"One of the positives of this announcement is that it shows that the Gorgon partners have the size and clout to create their own market opportunities in a very competitive market," he said.
The Timor Sea's Sunrise is targeting the same markets, but a lack of unity within the joint venture appears to be counting against it. According to a spokesman for Shell, which has interests in both Gorgon and Sunrise, the Gorgon venture has its "nose out in front at the moment." The spokesman said that while Shell remains committed to Sunrise, without "commercial alignment" within the joint venture there are no plans at this stage for Shell to sign up Sunrise gas for the North American market.

Last year the Sunrise joint venture was hit by dissension. While Shell pushed for Sunrise to be developed using an offshore LNG plant built using its technology and targeting markets on the North American west coast, partner ConocoPhillips had pushed for the gas to be piped 500 km to shore at Darwin in Australia's Northern Territory to supply the local market.
The partners are now concentrating on the offshore option but with a focus also on Asian markets. However, commercial terms between the partners for any offshore development haven't been agreed upon, while an onshore development hasn't been completely ruled out.