INSIGHT

Negative report on floating LNG technology in WA

By Tracey Greenaway, Mark McAleer
Climate Change Energy Oil & Gas

In brief

A major report on the economic viability of using floating LNG technology in WA has found it has the potential to impact negatively on that State's domestic gas supply and the State Government's revenue base. Partners Tracey Greenaway and Mark McAleer and Lawyer Anne Beresford consider the key findings and implications of the report, especially for those contemplating/planning a floating LNG project in WA waters.

Background

The Economics and Industry Standing Committee of the Western Australian Legislative Assembly (the Committee) has released its report on the economic impact of floating LNG on Western Australia (the Report). It is the culmination of a 12-month inquiry. The Committee resolved to inquire into the impact of the use of floating LNG technology in Western Australia in May 2013. The Committee has the responsibility for reporting to the Western Australian Parliament on a variety of matters including on the adequacy of legislation and other matters of importance referred to it, such as this issue.

The Report concludes that using floating LNG technology as an alternative to onshore gas processing would 'negatively impact upon WA industry, while also undermining the state's domestic gas supply and public revenue base'. The Report is likely to reinforce the WA Government's opposition to the use of floating LNG as an alternative to processing onshore in Western Australia.

Key findings

The Report, released on 15 May 2014, makes detailed findings and recommendations relating to a broad range of matters. Some of the key findings are:

Clarification of Federal and State responsibility

Many of the findings encourage the WA Government to take action to clarify the responsibilities between the State and Federal governments or to lobby the Federal Government to take action on this matter. If the recommendations are pursued successfully by the WA Government, there may be changes to the approvals processes under the Offshore Petroleum Greenhouse Gas Storage Act 2006 (Cth) and to the processes followed by the Joint Authority.

The Report is highly critical of the Federal Government's unilateral decision to approve variations to five Browse retention leases in Commonwealth waters in August 2013. The Report states that the decision 'was made without fair and reasonable consideration of Western Australia's position on the leases and the impact on the development of the Retention leases for State Titles'.

We note that the National Offshore Petroleum Titles Administrator (NOPTA) has recently revised Commonwealth-State boundaries in the area of the Browse development, resulting in a greater portion of the Browse project falling within State waters. The Mines and Petroleum Minister, Bill Marmion, told the WA Parliament on 14 May 2014 that the NOPTA revision may mean that 'as much of 50% of the Torosa field could be in WA waters'. This brings the allocation of Federal and State responsibilities to the forefront of the political debate.

Limited economic and employment opportunities for local business

The Report found that due to the use of global engineering, procurement and construction management contracting and the 'design one, build many' concept of floating LNG project design, with detailed engineering being undertaken overseas, there are limited domestic economic opportunities from domestic floating LNG projects.

In contrast, in commenting on the Report, APPEA has stated that 'just one FLNG vessel had the potential to deliver up to 1000 highly-skilled, well-paid jobs and around $12 billion in tax revenue during its 25-year operating life. The same project could also generate around $45 billion in economic activity and up to $200 million every year in maintenance and supply contracts for local companies'.

Lack of domestic gas supply as a result of floating LNG projects

The Report expresses the concern that gas produced from floating LNG projects will be solely for export, and will not supply any gas for households and industry in Western Australia. According to the Report, this will have severe impacts on economic development and energy demand. The Report recommends that the WA Government continue to play an active role in energy regulation in Western Australia, and maintain its policy on securing domestic gas supplies. Western Australia is currently the only Australian state or territory to have adopted a domestic gas reservation policy.

The potential for WA to become a 'centre of excellence' for floating LNG

The Committee acknowledges that the use of floating LNG technology in the right circumstances could generate significant opportunities for Australian engineers and manufacturers. The Committee has undertaken to report further on the possible opportunities that floating LNG may offer Western Australia.

The Report recognises the potential for Western Australia to become a centre of excellence for floating LNG, in particular in relation to engineering and design and recommends that the WA Government work with engineering organisations to develop strategies that will broaden, promote and retain the engineering skills base in Western Australia.

The Report identifies the opportunity to develop onshore supply bases, emergency response facilities, helicopter support facilities and fabrication and maintenance facilities to support floating LNG developments.

Implications

The Report looks set to reinforce the WA Government's opposition to the development of resources using floating LNG technology. The WA Government is likely to seek to impose conditions on proposed floating LNG projects that would be located in State waters in order to increase the benefits to the State. Companies looking to develop resources offshore Western Australia by way of floating LNG should:

  • engage early with the WA Government in relation to any proposed floating LNG project;
  • look for opportunities to involve Australian (particularly West Australian) content in the project during the construction and operational phase, including employing local staff and procuring supplies from local businesses; and
  • carefully consider how any domestic gas supply obligations may impact on project structuring and economics.

If you would like to find out more about the Report, please contact any of the people listed below.