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The politics of Australian LNG supply to California – It’s all about the game (part 3)

“Long is the way, and hard, that out of hell leads up to light” – J Milton

In parts one and two of ‘the game’ we investigated the prospects for Australian companies to grab a piece of the expected future LNG market in California. It has been widely reported that from around 2007 there will be a gas supply shortfall in the US, and California is at the end of the supply line.

Imported LNG is perceived by some to be the most cost effective and efficient method for overcoming projected energy security issues. However, to enable LNG import there is a requirement to build further receiving/re-gasification terminals close to market to facilitate the cost and environmental benefits of the fuel over traditional oil based operations.

A number of proposals are currently under review within the regulatory approvals process of both the US and Mexican governments and the race is on between rival energy companies to achieve the necessary go ahead and thereby capture their share of what is expected to be a long-term, lucrative market. From an Australian company perspective, both BHP Billiton and Woodside Energy are looking to cement their place in this supply chain.

Woodside recently backed out of an arrangement to potentially operate an offshore re-gasification facility with partner Crystal Energy that is currently under approval by US authorities, preferring instead to consider building their own facility in Baja California. BHP Billiton are perceived as a front-runner by some, with their Cabrillo Deepwater offshore terminal proposal.

There are many troubling aspects with the proposals to build LNG re-gasification terminals for this market. Onshore terminals, by necessity are invariably sited close to population centres. A number of previous proposals have already been cancelled following sustained pressure from local opposition groups citing perceived safety fears. Offshore terminals, although less overtly visible have also run into considerable local resistance.

Added to this impediment offshore are the technical limitations of the process itself. So far, the world’s leading LNG companies have failed to successfully and safely overcome the technological barriers in transferring LNG from incoming vessels to a floating storage and distribution structure in a dynamic offshore environment.

Given the backdrop, it has become clear the import of LNG for the Californian market has become highly politicised. This third article of ‘the game’ analyses political influences working away in the background.

Overview

Now that the ugly spectre of peak oil has finally gained some traction in both the business and general population, come what may, California will get its back-up of LNG supply from overseas markets. All that has to be determined is who will be providing the fuel and what countries it will eventually come from.

The price of oil is on the up and those who are supposed to be in the know are suggesting it isn’t coming down anytime soon. In times past, LNG has been the poor sister to oil - expensive to develop, long development lead times, capital intensive and certainly less fungible than oil. Gas was held in such disdain, that for many years excess quantities have been burnt off and vented into the atmosphere, a scenario still practiced in various parts of the world today.

These practices have suddenly entered the non politically correct arena with the current oil price/global warming set up and consequently more functional uses for gas are being forced upon oil & gas developers.

A considerable amount of Australia’s hydrocarbon resources consist of gas, generally in large parcels but often in remote locations without associated development infrastructure nearby. With Australia being perceived as gas prone internationally, this limits the type of player and investment dollars that can be attracted to explore here.

This is contrasted with a declining oil production profile which masks the fact that condensate (liquid recovered from a separation system at the wellhead as gas is being produced) constitutes the greater part of Australian liquid reserves. This situation will soon lead to an untenable extra burden on Australia’s balance of payments deficit. In short order, there is a political imperative to develop some of Australia’s vast stranded gas reserves, hopefully with condensate alongside. That is where the predicament lies and the politics begin.

Hostage to oil industry multi-nationals

Unlike many other countries that have their own national oil companies, Australia in the main, relies on the multi-nationals of the oil industry to invest their capital to develop its oil & gas resources. In a matey world this is fine but when the notion of energy security is raised, it highlights the control of potentially vital resource production in foreign hands. All governments feel uncomfortable with this scenario, which is one of the reasons the proposed Shell takeover of Woodside was rejected at the Federal level on national interest grounds just a few years ago.

Nonetheless, at present, almost 1/3 of Australia’s known gas reserves are currently involved in the proposed and contentious Greater Gorgon gas development which is owned in a joint venture between Chevron and Exxon of the US and Europe’s Shell Oil Company. Gorgon gas is destined for the US market by its proponents and for California in particular, which puts it in direct competition with BHP Billiton’s Cabrillo Deepwater development proposal. However, the Gorgon gas project, which hosts a particularly controversial carbon sequestration demonstration element as part of the development proposal, has still not received final approval from Australian authorities.

Cheerleading for Australian LNG

One can legitimately ask why an internationally renowned company like BHP Billiton would come up with such a technically suspect LNG development proposal as Cabrillo Deepwater with the benefit of substantial Australian government support in the background. Is it just to gain a foothold in the market, or are the deeper motives of both parties lurking in the background?

There is little denying the public support that has been provided BHPB by Team Howard, with regular media acknowledgements and personal trips to California by senior government ministers pushing the ‘Australian LNG’ barrow. Then there is the more sinister helping hand in the ‘covering up’ of part 1 of the original Barrell Report*, commissioned in April 1996 by then Federal Resources Minister, Senator Warwick Parer into the safety management and practices of BHP Petroleum’s offshore activities. This is an important issue because it effectively means that someone in the Australian Federal government is guilty of ‘altering history’ by arranging archiving of the original document, as outlined in its original terms of reference, behind the secondary objective of Barrell’s invited assignment in Australia.**

What is currently available for public scrutiny is not the primary data (contrary to Parer’s original assertions). Barrell’s ‘follow up’ trip to Australia in 1997, reviewing progress on the same subject matter also appears to have ‘dropped off’ the public record. Questions need to be asked in this area!

For their part, BHP Billiton have gone the ‘political’ route with this project right from the get go, perhaps realising the weakness of their proposal if challenged from a technical perspective. Apart from a highly visible hiring of lobbyists close to the Californian power centre, the company has maintained a high profile public relations presence within the local community to distil the virtues and benefits of their proposal.

US government authorities also ‘appear’ to be providing significant encouragement for the Cabrillo Deepwater proposal, notwithstanding the queries that have been raised by some in the regulatory area and from others within local government circles.

Wider context

Upon examination of all the political dynamics surrounding the Cabrillo Deepwater proposal, one can only make sense of the motives of all parties if one looks at the background in a wider context. The key to understanding this is BHP Billiton’s long held desire to build a major gas pipeline from Iran through Pakistan, then extending the pipeline a further 1500 km or so to India to meet growing Indian demand for energy. In 1993 an MOU (Memorandum of Understanding) had been signed between the Iranian and Indian governments to build a 2670km pipeline linking the 2 countries.

This project has been continually stymied by successive US administrations and possibly their Australian counterparts because it interfered with the direction of US foreign policy. The Iran/Pakistan leg of the project was ready to go almost 10 years ago with first contracts in place, but the US produced the big stick of possible retrospectivity provisions in the Iran Foreign Oil Sanctions Act, which penalised any non US company who made investments over US$40 million to help develop Iran’s oil and gas sector.

Just as in the case of Unocal’s proposed pipeline from the Caspian region, through Afghanistan to Pakistan then onwards to India, these projects do not go away because of geopolitical considerations. Rather instead, they go into the background, hopefully to be re-born at a later date or to be used as leverage to gain concessions in other areas.

The BHPB Iran to India pipeline proposal is no secret and has been widely reported over the years. What is more interesting is the recent history surrounding the proposal and the timing of ‘other’ events in the region. In January 2002, Paul Samson, BHP Billiton’s Vice President in Iran gave a presentation at the Fourth Indian Oil & Gas Conference outlining the company’s aspirations and the long term benefits for the countries involved. BHP Billiton is mandated by NIOC (National Iranian Oil Company) to execute the project should it come to fruition but as most people are aware there are some current ‘noises’ being made regarding Iranian plans in the energy area.

Filling in some of the background detail and adding context to the situation gives a clearer picture regarding some of the political machinations that underlie the complex world of energy security and supply.

Does this have anything to do with the proposed Cabrillo Deepwater proposal offshore California? Who knows? However, it was interesting to note that after a sustained period in the darkness as far as media coverage is concerned, it was reported by the Press Trust of India in early June that “BHP Billiton, the world's largest diversified resources company, has said that there are sufficient features in the pre-feasibility study of the 4.16-billion dollar Iran-Pakistan-India natural gas pipeline to ensure safety.”

As I remember, it was about that time that serious questions were being posed about the viability of Cabrillo Deepwater and official documents were brought to light which cast doubt on the geological integrity of the proposal.

There are plenty of twists to this tale, not least of which is the curious ‘on hold’ status of Chevron’s Port Pelican Deepwater LNG terminal 37 miles offshore Louisiana. This was the first offshore LNG receiving and re-gasification facility to obtain approval in the US and was due to be commissioned in late 2006. Of note here, given that the terminal is offshore, is the technical criteria for building the facility.

The prime technical consideration, as outlined in the proposal application was water depth – the facility is proposed in water depth of 83 feet. It seems rather anomalous that the Cabrillo Deepwater proposal and its 2900 foot water depth can be seriously considered when this type of facility and the technology it entails is still unproven – politics, I guess.

Finally, it is relevant to comment on the sort of coverage these multi-billion dollar energy proposals receive in the mainstream media. Commentary is remarkably consistent regardless of which country it emanates from. Coverage tends to centre around personalities rather than serious analogy of the technical or political complexities involved. Consequently, we read plenty about Governor Schwarzenegger acting like he knows something about safety with these proposals whilst the Australian press tends to 'play up' the cheerleading activities from members of Team Howard.

In conclusion, it is not unreasonable to infer the Cabrillo Deepwater proposal goes right to the heart of events that have made the world a far more dangerous place to live in of late. In a wider sense, inter-governmental politics will decide whether the proposal is given the green light or otherwise – which, in the main will only be of interest to the local population and BHPB's future bottom line prospects. Either way, it is likely we shall see some movement towards an outcome before the year is out – particularly if the oil price keeps heading on its present trajectory.

--

REFERENCES:
* THE REGULATION OF HEALTH AND SAFETY IN THE AUSTRALIAN OFFSHORE PETROLEUM INDUSTRY (1996 BARRELL REPORT)
(Last updated: 18/11/2004)
Report by Dr Tony Barrell, 1996

www.isr.gov.au/content/itrinternet/cmscontent.cfm?ObjectID=3CF31084-5A0A-4559-AB7E44560DEC2A9D

** PRESS RELEASE (MINISTER FOR RESOURCES AND ENERGY)
Cover date
3 Apr. 1996

TERMS OF REFERENCE
The review is to be in two parts.
1. The first part involves a review of BHP Petroleum's (BHPP's) safety management arrangements relating to the recent Griffin Venture safety incident. The consultant, in preparing his report,
is to:
1.1 examine the circumstances of the recent Griffin Venture incident to provide advice on whether there were any cultural, management, operational, procedural or training deficiencies which may have contributed to the incident; and to review subsequent measures undertaken by BHPP since the incident;
1.2 review the preparation and current status of the Griffin Venture safety case;
1.3 provide advice on whether current BHPP safety management arrangements are satisfactory, and whether there are any other relevant measures which could improve the safety performance on BHPP's offshore facilities.
2. The second part involves taking advantage of the consultant's expertise in offshore safety to review and report through the National Oil and Gas Safety Advisory Committee (NOGSAC) on progress in implementing the following aspects of the Australian safety case regime:
2.1 examine the roles assumed by the different parties including:
. the interaction between the regulators and between themselves and the operators;
. the capacity of all parties to implement their roles;
2.2 examine the adequacy of the regulatory provisions relating to safety administration, recognising the transitional stage of the legislative framework.
In light of the findings in parts 1 and 2 above, to provide a report to NOGSAC for their consideration and advice to the Minister for Resources and Energy.

--

Martin Hastings email: indelible at westnet.com.au

Editorial Notes: All is not going BHPB's way, as this Malibu Times article points out (thanks again Martin): Australian minister in 'a snit' over LNG terminal

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