Demand for Gas
Australia’s LNG exports exceeded 15 million tons in 2009, and are expected to reach 60 million metric tons (MMT) by 2015 if companies proceed with planned projects. Australia’s domestic demand for gas is expected to increase by three percent per annum and will reach 30.3 billion cubic meters by 2014. Gas will play an increasingly important role in energy production as the government proceeds with policies and initiatives to reduce carbon emissions. International demand for gas will also increase as the developed world turns to renewable energy and increases conservation efforts. Gas is forecast to account for 22 percent of all Australian energy consumption by 2025. Climate change concerns should drive the substitution of clean energy for high emission, coal-generated power.
National and state green policy initiatives will also increase demand for gas. These initiatives include:
• A Government commitment to reduce greenhouse pollution by 60 percent on 2000 levels by 2050. The medium-term target is for a five percent carbon emissions reduction by 2020.
• The State of Victoria’s commitment to increase its reliance on gas-powered electricity through proposed legislation calling for 20 percent reduction in greenhouse gas emissions by 2020.
• The State of Queensland requirement for companies to source 13 percent of the electricity from generated gas, reaching 18 percent in 2020. Even the move towards renewable energy is expected to create demand for gas, as companies will need a fast- response, readily storable back up alternatives for power generation. Internationall y, the Asia Pacific region, which Australia is uniquely positioned to serve, will account for about 50 percent of global LNG consumption by 2015. The Australian Bureau of Agricultural and Resource Economics (ABARE) Australian commodities report predicts that Australian LNG exports will rise by 13 percent to 17.4 MMt (million metric tons) in 2009 -2010 and will rise by an additional three percent in 2010 – 2011.
Australia’s geographical proximity to burgeoning Asian economies and its secure geopolitical situation will assure continued Asian demand, which is expected to increase as existing LNG fields in Malaysia and Indonesia come to the end of their operational life. China has become the greatest energy consumer in the world, and is projected to increase its demand for LNG by 50 per cent to 46 million tonnes in the next 10 years. India is emerging as a major LNG market which Australia is well-positioned to service.
Demand for CBMs
Coal bed methane (CBM), or coal seam gas (CSG) as it is known in Australia, is a burgeoning industry. CBM is used for the same purposes as LNG, and can be converted to LNG for export. CBM accounts for 30 percent of Australia’s proven and probable gas reserves. More than 50 major international and Australian companies, including Chevron and ConocoPhilllips, are active in exploring and developing the resource. Reports of new developments occur daily. To date, the Bowen, Surat, and Sydney Basins in Queensland and New South Wales are the sites of most CBM exploration and production. Companies have explored other coal bed locations, but have not yet found commercially exploitable CBM reserves.
A challenge unique to the Australian market is the issue of ramp gas (gas released as well drilling begins). Flaring is no longer an option and so storage or alternative-use solutions are important. Government concerns about increased groundwater and soil pollution from CBM water have impacted some CBM projects. In July 2010, Queensland and Federal environmental authorities delayed final approval of the Santos/BG Group’s multi-billion dollar CBM-to-LNG plant due to concerns over application of CBM water and discharge of brine and effluent into the sea. Recent developments include new environmental guidelines for CBM water in Queensland and the establishment of a CBM water monitoring program. Companies will need to construct treatment facilities for vast amounts CBM-generated waste water. Companies will also need to pursue pollution abatement measures for former evaporative ponds. Pipeline, used in extraction and in transportation to processors or power plants, is an essential component of the CBM industry. Planned CBM-to-LNG plants in Gladstone, Queensland will need thousands of kilometers of pipeline to carry CBM feedstock from the wells. Power generation from CBM is increasing. Opportunities in EPCM (engineering, procurement, construction, management) and equipment supply exist in this sector. The Australian Energy Market Operator (AEMO) is introducing a wholesale gas short-term trading market (STTM) for Sydney and Adelaide. The STTM and AEMO will offer opportunities for IT services such as demand forecasting and auditing, as well as engineering, construction, procurement, and management services for CBM-fed power stations.
Australian companies place a priority on the health and safety of the local work force. Stringent regulations, organized union activity, and modern company practices all help to maintain the importance of worker safety. Products or services that enhance this aspect of gas drilling and production enjoy strong demand. Companies are also very interested in automated systems that can maximize worker safety.
Drilling companies are always interested in equipment that can reduce operating costs.
Most Australian CBM companies maintain a procurement manager or team to manage sourcing. For larger companies, the procurement office could be located at a head office, or at each drilling or processing site. Small and large CBM companies tend to outsource operations to EPCMs. CBM companies delegate purchase decisions for consumables, such as connectors and valves, down the management line to the drilling-site manager, purchasing manager, or maintenance manager. Sources advise that consumables show little product differentiation and are very price sensitive.
Overseas OEMs sell consumables through general-stocking distributors. As in the U.S., it is important for consumables to be close to the site. Established agents and distributors usually locate near key CBM regions, allowing them to make regular site visits. Some wells and processing plants hold consumable stock on site. Specialist retailers and wholesalers, rather than general suppliers, market more specialized products such as drilling supplies and consumables.
CBM companies purchase capital or processing equipment through a tender process. Tenders can vary from widely-publicized, open tenders to pre-qualified, closed tenders.
For large-scale projects, CBM companies use EPCMs to assist in project design and development. U.S. companies that bid for tendered projects should have knowledge of local technical requirements and may have to submit to several levels of qualification.
Australian CBM companies stress the importance of local support and service. U.S. companies will need to establish a local sales presence to succeed in the market. For capital equipment, U.S. companies may also need to form strategic alliances with EPCM contractors.
American companies should visit Australia to meet prospective partners and to demonstrate ongoing support, as this is the common practice of their European competitors.
We can assist most American firms to select agents, distributors, and customers in Australia. Performing due diligence in Australia is as important as in the United States, and we can assist in that work as well.
Market Issues & Obstacles
In 2005, Australia and the United States enacted a Free Trade Agreement (FTA), which eliminated import duties on more than 99 percent of tariff lines, including mining and drilling equipment. Prior to the FTA, the maximum general tariff on most products was five percent.
The Australian government imposes a Goods and Services Tax (GST) on both imported and locally manufactured equipment. The GST is a broad-based tax of ten percent on the supply of most goods and services consumed in Australia. It is akin to the value-added tax systems in Canada and Europe.
The CBM industry is highly regulated and involves multiple governmental agencies at the state and federal level. Requirements differ from state-to-state, so approval in one state does not transfer to another state.
Challenges in the Australian market, as elsewhere, include environmental protection and creation of the infrastructure necessary to fully exploit this resource.
Other nations in the region are expected to increase their contributions to global supply of LNG from CBM and other sources, which could diminish Australia’s market share. China, a major consumer of Australian LNG, is investing heavily in its own CBM industry which analysts claim could reduce demand for Australian LNG. CBM projects are underway in Japan, Russia, the Ukraine, Europe and the U.S.
Australia’s CBM industry has had recent consolidation in the production sector. Some analysts expect further consolidation, especially among companies producing liquefied natural gas from CBM for export. This will concentrate resources in the hands of fewer companies and could limit the ability of suppliers to bid on contracts.