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Refining Going Down Under

Despite being rich in energy resources Australias refining sector is


undergoing massive downsizing. The country will lose nearly 50% of
its refining capacity in the next two years, according to Platts data.
The capacity is expected to fall by around 386,000 b/d during that
period to around 455,000 b/d, with the industry crippled by high
operating costs and poor refining margins. However, its burgeoning

A
LNG sector gives cause for optimism.
ustralia is rich in com- according to the World Nu- markets make it an attractive
modities, including clear Association. Australia is place for foreign investment.
fossil fuel and uranium a net importer of crude oil and The previous Australian gov-
reserves. It is one of refined petroleum products, ernment published an Energy
the few countries belonging to although the country exports White Paper in 2012 that out-
the Organization for Economic some petroleum liquids. lines an energy policy that
Cooperation and Development
(OECD) that is a significant net
energy exporter, sending nearly
70% of its total energy produc-
tion (excluding energy imports)
overseas, according to data from
Australia's Bureau of Resource
and Energy Economics (BREE).

Except for crude oil and


other liquids, Australia retains
a surplus of all other energy
commodities. Australia was the
world's second-largest coal ex-
porter based on weight in 2012
and the third-largest exporter of
liquefied natural gas (LNG) in
R 2013. Energy exports accounted
E for 24% of Australia's total ex-
port revenues in 2012, accord-
P ing to BREE. The country holds
the world's largest recoverable
O reserves of uranium (about Australia's stable political attempts to balance securing
32%, based on 2012 data) and environment, relatively trans- domestic energy at affordable
R is the third-largest producer parent regulatory structure, prices with increasing exports
and exporter of uranium for substantial hydrocarbon re- to help supply Asia's growing
T nuclear-powered electricity, serves, and proximity to Asian demand for fuel.

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Both of these paths involve 5% of the oil resources. Western domestic oil produced in the
developing more energy in- Australia (including the Bona- Bass Strait offshore of south-
frastructure, attracting greater parte Basin straddling Western eastern Australia and from the
investment, creating efficient Australia and Northern Terri- country's crude oil imports.
energy markets and pricing tory) has 72% of the country's Refining throughput meets
mechanisms for consumers, and proven crude oil reserves, as an estimated 56% of domestic
delivering cleaner and more sus- well as 92% of its condensate demand, according to FGE. As
tainable energy. More recently, and 79% of its LPG reserves. refining capacity diminishes in
Australia's expanding energy The two largest oil-producing Australia, this share will also
industry has encountered escalat- basins are the Carnarvon Basin decline as petroleum product
ing project costs and a shortage in northwestern Australia and imports increase.
of labor. These factors, coupled the Gippsland Basin in south-
with a bigger push for clean en- eastern Australia. Carnarvon Australia's refining margins
ergy and stricter environmental Basin production, accounting have tightened, and the major
regulations in some states, are for 61% of total liquids produc- refiners are taking financial
challenges that domestic and tion in 2013, is mostly exported, losses as a result of increasing
international companies face and Gippsland Basin oil pro- refinery competition within
in developing Australia's en- duction, representing a 19% Asia, Australia's escalating la-
ergy resources. share in 2013, is predominantly bor and operating costs, stricter
refined for domestic use. environmental standards on
Oil fuels, and higher prices of im-
According to sources, Aus- According to FGE, Australia ported crude oil. Australia's
tralia held more than 1.4 billion had 6 major refineries at the refineries are small and dated
barrels of proved oil reserves as beginning of 2014, with a total compared to the larger and
of January 1, 2014. Geoscience crude oil refining capacity of more complex refineries being
Australia reported economic 634,000 bbl/d operated by BP, built within Asia. These unfa-
reserves, which include proved vorable economics have pres-
and probable commercial re- On the world stage Aus- sured operators to close several
serves, of nearly 3.8 billion tralia is a small consumer facilities and convert some of
barrels, composed of 0.9 billion of fuel and has always them to oil product import ter-
barrels crude oil, 1.9 billion had a small refining ca- minals. ExxonMobil closed its
barrels condensates, and 0.9 pacity to matchJust 80,000 bbl/d Adelaide refinery
billion liquid petroleum gas one of the giant refineries in 2003. Shell also shut down
(LPG) as of December 2012. in India or Singapore is the 85,000 bbl/d Clyde refinery,
Most Australian crude oil is big enough to produce located near Sydney, in late
a light, sweet grade, typically double the output of 2012, which had contributed to
low in sulfur and wax, and Australias entire fleet Australia becoming Asia's top
therefore higher in value than of refineries. diesel importer. Planned clo-
the heavier crudes. The major- sures include Caltex's 125,000
ity of reserves are located off the ExxonMobil, Shell, and Caltex bbl/d-Kurnell refinery located
coasts of the states of Western Australia. Scheduled refinery near Sydney by the end of 2014
Australia, Victoria, and the closures will reduce this capac- and BP's Bulwer Island facility
Northern Territory. Onshore ity to 414,000 bbl/d by the end by mid-2015. Shell announced
basins, mostly found in the of 2015. Crude oil feedstock the sale of its 105,000 bbl/d-
Cooper Basin, account for only for these refineries comes from Geelong refinery to oil trading

HYDROCARBON ASIA, JULY-SEPT 2014 7


company Vitol in 2014, leaving sumption and to be considered estimated total proved plus
the fate of this refinery uncer- a leading gas exporter. Several probable commercial reserves
tain. Overall, these refinery recent discoveries and growing at 132 Tcf (99 Tcf of traditional
closures represent about half regional demand for gas have natural gas and 33 Tcf of coal
of the capacity in operation a spurred more investment ac- bed methane-CBM) as of 2012.
decade ago, and these closures tivity in the country's reserves. Most of the traditional gas re-
will likely lead to increases in Australia's natural gas reserves sources (about 92%) are located
the country's petroleum product vary by industry source and in the North West Shelf (NWS)
imports, particularly for diesel, the category of commercial offshore in the Carnarvon,
gasoline, and jet fuel. viability. According to sources, Browse, and Bonaparte basins.
Australia's proved natural gas
Natural Gas reserves were more than 43 tril- The natural gas industry
Australia produces enough lion cubic feet (Tcf) as of Janu- is regulated by the Depart-
natural gas to cover its con- ary 2014. Geoscience Australia ment of Resources, Energy,

Bulwer Island Down ing to service the energy where growth in energy
BP is ceasing production growth areas of the globe consumption is slowing.
at its Bulwer Island refin- and is doing so with very
ery in Brisbane, Australia large port-based refineries," "If you look at the play-
by mid 2015, blaming com- Andy Holmes, president ers in Australia, there are
petition from new mega- of BP Australasia, said in a BP, Chevron and Shell and
refineries in Asia that are media conference. they do have refineries
cheaper to operate. elsewhere in Asia outside
BP said it was consider- of Australia," said Suresh
Australia's refineries, ing converting the Bulwer Sivanandam, short-term
o w n e d b y B P, R o y a l Island refinery, which dates downstream oil analyst
Dutch Shell , ExxonMobil back to the 1960s and has a at Wood Mackenzie
and Caltex, have mostly capacity to produce 102,000
booked losses over sev- barrels of fuel per day, into "For example, Chevron
eral years as a higher a multi-product import ter- has refineries in South
local dollar, tighter fuel minal. Korea and Thailand and
quality standards and the Shell has Malaysia, Sin-
introduction of super- "We have concluded that gapore and also Japan.
sized refineries in Asia the best option for strength- They can easily meet
have made them uncom- ening BP's long-term supply Australia's deficit from
petitive. position in the east coast these markets," Sivanan-
retail and commercial fuels dam said.
Rather than spend mon- markets is to purchase prod-
ey on upgrading plants, uct from other refineries," BP employs 380 staff and
BP and other majors have Holmes said. 300 contractors at Bulwer.
been looking to sell them The refinery has a capac-
or turn them into fuel The shift away from re- ity of around 102,000 bar-
import depots. fining in Australia follows rels per day and produces
reductions in refining in petrol, diesel, kerosene,
"Market reality global countries including Ger- aviation fuel, heating oil
refining capacity is shift- many, France and Britain, and LPG.

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and Tourism (RET) and the project participants approved struction in late 2011. When
Ministerial Council of En- the first-phase development complete in 2016, the first two
ergy (MCE). The MCE was of the Greater Western Flank trains of its LNG export plant
c re a t e d i n 2 0 0 1 t o f o s t e r Project containing up to 3 Tcf are expected to export 430
policy coordination between of gas and 100 million barrels Bcf/y. Maximum production
the Commonwealth and the of recoverable condensate. from the project is anticipated
state governments. The MCE The project is expected to start at 584 Bcf/y of natural gas and
functions as the national in 2016. 30,000 bbl/d of condensate.
policy and governance body
for Australia's energy mar- The Greater Gorgon fields, The first stage of the Pluto
ket, and the group consists of located approximately 100 Project near Karratha, offshore
ministers with responsibility miles off the northwest coast of Western Australia, came online
for energy from the Austral- Australia in the North Carnar- in March 2012 with estimated
ian government and all states von Basin near Barrow Island, LNG capacity of 200 Bcf/y.
and territories. are collectively the country's Woodside Energy owns 90%
largest known gas resource, of the venture supported by
Many of Australia's new gas and the Gorgon Project could 15-year sales contracts with
field developments are tied to encompass total reserves of 40 Kansai Electric and Tokyo Gas,
liquefaction projects that have Tcf. The project, led by Chevron which hold 5% equity each.
several export contracts in (50%), with Shell and Exxon- The Pluto project includes an
place. Several major new LNG Mobil (25% each), is under offshore platform connecting
projects are under construction construction and is on track five subsea wells and a 112-mile
or in advanced planning stages to be completed in 2015. The pipeline to an onshore LNG fa-
to support Asia's increasing project includes development cility on the Burrup Peninsula.
appetite for natural gas. of the Gorgon and Jansz-Io Plans for a second train are on
gas fields, with connection by hold while project owners seek
The North West Shelf of Aus- subsea pipelines to Barrow additional gas supply.
tralia in the Carnarvon Basin Island, where LNG processing
holds some of the country's facilities will have production The Browse Basin Devel-
most mature and prolific fields capacity of 750 MMcf/y. One opment Program is another
that are the prime sources for of the project's key features key area of gas discoveries in
the North West Shelf LNG is injecting the fields' carbon offshore northern Australia.
terminal. As part of the North dioxide (CO2) into deep forma- The largest field in the basin,
Rankin Redevelopment Project, tions beneath Barrow Island Ichthys, holds 12.8 Tcf of gas
the NWS Project develop- to reduce overall greenhouse and 530 million barrels of con-
ers are investing about $4.8 gas emissions. The project is densate reserves. Construction
billion to recover remaining expected to produce 950 billion on this field began in 2012.
low-pressure gas from the cubic feet per year (Bcf/y) of The project is led by Japan's
North Rankin and Perseus gas natural gas and 20,000 bbl/d INPEX (66%) and Total (30%).
fields. Also, a new production of condensate when completed. A 552-mile undersea pipeline
platform, North Rankin B, will will connect the fields to a
be installed in 2013 to support Another major project under new export LNG terminal to
production of smaller fields development neighboring the be built near Darwin. When
and extend their development Gorgon Project is the Wheat- the project becomes opera-
until 2040. Also, the NWS stone Project that began con- tional in 2017, its production

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is expected to be 400 Bcf/y kets, Australia has become a Other key consumers include
of LNG, 100,000 bbl/d of leader of LNG supply for the China, South Korea, and
condensate, and 32,000 bbl/d Pacific basin. Over the past dec- Taiwan. Japan's demand for
of LPG. Other smaller fields ade, Australian LNG exports LNG rose in 2011 when natural
under development in Browse have increased nearly three gas-fired generation was sub-
are Crux and Prelude. The part- times, and they are expected stituted for the lost nuclear
ners developing Crux received to rise substantially in the me- capacity following the Fuku-
a five-year retention lease in dium term as developers usher shima power plant accident.
2013 and continue to discuss in new upstream and liquefac- Australia became the largest
gas processing options, such tion capacity. Australia, the source of LNG for Japan by
as constructing a designated third-largest LNG exporter in 2012. Chinese national oil com-
stand-alone floating LNG ter- the world behind Qatar and panies (NOCs) have teamed
minal or supplying gas to other Malaysia, exported 1,070 Bcf with international oil compa-
projects such as Shell's planned of LNG in 2013, up from about nies (IOCs) on investments in
Prelude LNG floating terminal. 990 Bcf in 2012, according to several Australian liquefac-
tion projects
The Bonaparte and signed
Basin in the gas purchase
Timor Sea strad- agreements to
dles the waters lock in supply
of Australia and for the grow-
East Timor and ing market in
holds some China.
undeveloped
gas resources. Australia has
ConocoPhillips three LNG ex-
is currently port facilities
drilling fields with a total
at the Bayu Un- capacity of al-
dan natural gas most 1.2 Tcf per
and condensate year. The larg-
field. The Great- est is North
er Sunrise field We s t S h e l f
is a new devel- LNG, owned
opment that has and operated
estimated re- by a consor-
sources of more tium of Wood-
than 5 Tcf of gas side, Shell, BP,
and 230 million Chevron, Ja-
barrels of condensates. IHS Energy. Australia exports pan Australia LNG, and BHP
natural gas almost exclusively Billiton. The facility has five
LNG to Asian markets, with Japan offshore LNG trains with a
As a result of its abundant gas purchasing about 80% of Aus- total capacity of 780 Bcf/y, and
resources and its geographic tralia's exports in 2013, mostly it relies on natural gas sup-
proximity to consumer mar- through long-term contracts. plied from nearby fields in the

HYDROCARBON ASIA, JULY-SEPT 2014 11


North West Shelf (NWS). The pand substantially. Most of resources in Queensland to
majority of LNG produced by the liquefaction projects are convert the fuel to LNG, CBM
the consortium is exported to located in the coastal or offshore projects pose unique challenges
Japan by long-term contracts. northwestern Australia and in to production. There are typi-
Darwin LNG, operated by the the northeastern Queensland cally more hurdles for environ-
consortium of ConocoPhillips, region. Some projects such as mental approval. Also, CBM
Santos, Eni, INPEX, Tokyo Gas, Ichthys are designed to pro- wells produce much less than
and Tokyo Electric (TEPCO) is duce associated condensates traditional gas wells and ramp
Australia's second facility. It and LPG. Currently, there are up to peak production over a
has one production train with 7 projects under construction much longer period, according
capacity of 170 Bcf/y and ex- with a total capacity of 3 Tcf/y, to PFC Energy.
ports LNG under contracts to 3 in Queensland and 4 in the
Tokyo Gas and Tokyo Electric. basins of the northwest coast Australia's burgeoning LNG
Darwin, located on Australia's and offshore. These projects industry faces acute capital
northern coast, is supplied with are scheduled to commence cost escalation requiring much
natural gas from the Bayu- operations by 2017. Other larger investments for new
Undan field in the Timor Sea. projects are waiting on regu- greenfield projects and has
Pluto LNG is Australia's most latory approval or final in- delayed or cancelled some
recent terminal to come online vestment decisions, although proposed projects. According
in 2012. Located in the North- these projects are facing com- to FGE and IHS Energy, cost
west region, Pluto LNG has a petition and delays because of increases are attributed to a
capacity of more than 200 Bcf/y. escalating costs and potential number of factors such as labor
Woodside is discussing expan- overcapacity for the amount of shortages and resultant high
sion plans for Pluto LNG, but available natural gas supply. wages, high material costs and
difficulties procuring additional Australia currently has more changes in engineering require-
gas reserves nearby and rising than $190 billion worth of LNG ments, appreciation of the Aus-
project costs pose challenges to projects under construction, tralian dollar to the U.S. dollar
the expansion moving forward. and the country is on target to between 2009 and 2013, greater
overtake Qatar as the world's environmental hurdles because
Australia has become largest LNG exporter by 2020, of more strict regulations, land
a leading LNG exporter according to industry sources. rights issues, and the remote
in the Asia-Pacific re- locations of some projects. Sev-
gion in the past decade. CBM-to-LNG projects have eral projects have experienced
Greater expected natural become feasible with the size- notable cost inflation such as
gas production and new able amount of gas reserves Ichthys, Gorgon, Wheatstone,
LNG capacity in the next associated with the coal pro- Gladstone, and Queensland
few years is likely to duction. Queensland Curtis Curtis. Pluto LNG also incurred
boost natural gas exports LNG could become the world's budget overruns by 30% from
even more. first LNG project of this kind, its original financial invest-
with two neighboring projects ment decision (FID) in 2007.
As new LNG facilities and under construction and two Ichthys LNG, sanctioned in
expansions of existing facili- other projects waiting on 2012, is currently the world's
ties come online within the final investment decisions. most expensive liquefaction
next decade, Australia's LNG Even though many companies project on a per unit basis,
export capacity is set to ex- are leveraging the vast CBM and Chevron's Gorgon LNG

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project cited cost increases of are turning to the floating (RET)
46% in U.S. dollar terms since liquefied natural gas (FLNG) Australian Energy Regulator
the project's final investment terminal design, which is less (AER)
decision, from $37 billion to expensive than the cost of an Australian Petroleum Produc-
$54 billion. onshore plant. Prelude LNG, tion and Exploration Associa-
located in the Browse Basin tion Ltd. (APPEA)
Some of the economic and off the northwest coast, is Chevron
resource constraints have slated to become the world's Energy Intelligence Finance
caused several equity partners first FLNG terminal by 2017 FACTS Global Energy
to prioritize and reduce their by using a new technology Ft.com
project portfolio stakes and developed by Shell. Woodside Geoscience Australia
even exit some projects. Also, decided to convert Browse IHS Energy
some neighboring projects LNG from a land-based ter- Minerals Council of Australia
face competition with each minal to a floating terminal Newsbase Asian Oil
other for contracted gas sup- in 2013 to reduce the massive Offshore Technology
ply and limited natural gas project costs. Gaz de France PFC Energy
production especially in the and Santos cancelled the Bo- Platts
eastern part of Australia. In naparte LNG project in 2014. Platt's Oilgram News
Australia's high-cost environ- Despite the FLNG design of Reuters
ment, international compa- Bonaparte LNG, the compa- Reuters
nies are beginning to target nies determined that the rates Rigzone News
their investments towards of return on investment were Santos
projects in more advanced too low based on the project's The Australian
stages and could shift focus rising costs and small gas Townsville Bulletin
to the expansion of existing resource base. Natural gas U.S. Energy Information Ad-
facilities or projects currently from the fields may be able ministration
under construction versus to feed other more advanced Woodside Energy HA
new projects in the planning LNG projects or piped to the
phase. In 2014, Shell sold its domestic market.
6.4% stake in the Wheatstone
LNG project to partner, KUF- References
PEC, a Kuwaiti company and AAP Newsfeed
decided to delay project de- APA Group (APA)
Have you read
velopment for Arrow LNG. Asia Pulse our other magazine?
As less expensive natural gas Australian Bureau of Agricul-
from Russia, the United States, ture and Resource Economics
and Africa is brought online (ABARE)
and exported, Australia faces Australian Bureau of Resources
global LNG supply competi- and Energy Economics (BREE) see us on the web at
http://www.safan.com
tion for projects that are not Australian Bureau of Statistics
currently under construction. (ABS)
Australian Department of For-
To reduce project costs and eign Affairs and Trade (DFAT)
to liquefy gas from fields that Australian Department of Re-
are far from shore, companies sources, Energy and Tourism

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