So says Deloitte’s national director of oil and gas Geoffrey Cann, who said Woodside Petroleum CEO Peter Coleman’s comments at APPEA 2015 last month – on this transition and the changing dynamics of client relationships – spoke to a critical issue that cannot be ignored.

Reflecting on APPEA 2015 in Melbourne, where the CSG industry was notable by its absence as far as booths devoted to projects go, Cann told Energy News that BG’s subsidiary QGC – which did have a massive booth – showed unique innovation to achieve a world-first: getting a CSG to LNG project online.

Cann likened this challenge to the anticipation prior to a Formula 1 Grand Prix, where the question as a car rolls off the assembly line is: “Will it actually start? Will all the lights and steering work?”

“These things [LNG projects] are big, very complex animals, and this transition is a one-time planned event,” Cann said.

“QGC went live with its plant on Curtis Island by using some of its Egyptian LNG plant professionals because their LNG plant over there had been shut down because it’s run out of gas. So they flew them over to help turn the plant on – really smart.

“That’s what Coleman would’ve been talking about – we need the lateral thinking to turn these plants on and show the world that we can do it because these CSG projects in particular are all brand new – nobody in the world has done it before – so there’s no one else you can turn to.

“It’s a unique problem, but at least one company, QGC, has shown it can be done.

“Between North West Shelf, Pluto, Darwin and now QGC, Australia now has four LNG plants. So it can be done, but it’s a big challenge.”

The other Formula 1 analogy Cann liked to use is the challenge all Australia’s CSG-LNG projects will encounter.

“After they’ve been running for a little while you have to turn them off, clean them up and fix anything that broke and turn them all back on again,” Cann said. “That’s called ‘the turnaround’, and one of the secrets to a great turnaround is how fast you can do it.

“CSG in particular won’t tolerate extended downtime, because the wells don’t easily shut down.”

“The second problem is that because there are so many LNG plants in Australia, you have to pace and sequence how you do this, because there just are not enough people in Australia to do this sort of thing.

“No one’s really sorted this through yet.”

The “F1 challenge” was highlighted on the whiteboard at Deloitte’s booth at APPEA 2015 in Melbourne, where an artist depicted issues discussed by industry professionals both at the booth and in Tweets during the conference containing the #AskDeloitte hashtag.

Cann said that, among other things, the board focused on getting costs and productivity right for the industry; the adoption of what he called “gas factory thinking”, getting “fit for 50” ($US50 oil price); and the need for greater collaboration between operators and the communities in which they operate.

“One great example was replicating the Formula 1 pit stop: a race car goes into the pits for a turnaround and comes out in seconds,” Cann told Energy News.

“How will Australia become effectively F1 pit stop for LNG, so when industry needs to turn around an LNG plant it does so faster than anyone else in the world?

“That’s the next mountain to climb, so how does the LNG industry become very reliable and very low-cost, so that it does attract the next round of investment.”

Supply disruption

While the CSG-LNG projects largely didn’t have their own APPEA booths in Melbourne, next year could be a different story, when Perth hosts LNG18.

For now, the focus is on the impact those east coast LNG mega-projects will have on gas prices – which is where Coleman’s comments at APPEA 2015 about dealing with Asian customers becomes so critical.

“Up until the CSG operations in Queensland become fully operational, gas supply in eastern Australia has been very stable, and volumes of gas have been more or less predictable,” Cann said.

“Over the last six to nine months as the gas hub at Wallumbilla has been opened – admittedly the volumes are very low – but it’s indicative of the challenges of having a systematic increase in supply of gas into any market place.

“So prices and volumes are going to demonstrate a fair amount of volatility until buyers and sellers in Australia figure out how to manage it.

“This will become a topic of more importance down the road – how do we manage that marketing and trading of gas. Woodside touched on it, and it will be a very significant part of Australia’s future.”

The issues industry faced transitioning from construction to operation was brought up by Coleman, who was brought to Deloitte’s booth during the conference by his chief operating officer Michael Utsler.

In his speech, Coleman warned industry at APPEA 2015 that they needed to be more bold and challenge themselves in looking where the next play will be – even if it meant that a company needs to change its portfolio.

“I think we need to look forward and really challenge ourselves and say, ‘we really don’t know what the future looks like, but do we need the play? Are there things that we need to get into and change our portfolio?’ Do we need to make decisions today to ensure that in five years’ time we’re playing in that game, and we can sell to Shanghai at a competitive price,” he said.

“That means the model is changing for us and the way we finance is changing for us, and that means the customer relationships are fundamentally changing – we’re going from national oil companies to megacities. The future will be: we will be dealing with megacities. Shanghai will be a megacity. China will have 45 megacities by 2025-2030.

“So we’re into a point where we’re no longer talking traditional customers. We will no longer have traditional pricing formulas.

“We’re going through the construction period and we complained about the fact that prices are high now we actually need to make a return.”

Structural strategies

This was critical, Cann said, because it will require a major re-think of how companies structure deals.

“In the case of Australia there are some companies who will be used to, say, buying gas in a certain fashion in a certain way from certain suppliers, and have done so for up to 10 years, and that relationship was stable and predictable, and didn’t require an awful lot of special risk management, and wasn’t really a board topic,” Cann said.

“That’s going to change, because down the road there is potential for gas to be far more volatile, with more people clamouring for it and vary different pricing.

“So industry needs to be much more prepared than it is to deal with that particular dimension of the market.”