-- Clyde Russell is a Reuters columnist. The views expressed arehis own.--
By Clyde Russell
LAUNCESTON, Australia, May 9 (Reuters) - Building a fleet ofthe world's largest vessels has been touted as the solution tothe high costs of developing the next phase of liquefied naturalgas (LNG) investments in Australia.
But floating LNG, while worthwhile, may not be theall-encompassing panacea that major oil and gas companies areseeking.
There are currently seven LNG projects, worth an estimated$200 billion, under construction in Australia, enough to makethe nation the world's largest producer of the super-chilledfuel by the time the last is commissioned around 2018.
These plants will add about 62 million tonnes of annual LNGcapacity to the existing 24.4 million tonnes, which willcatapult Australia's capacity past that of Qatar.
What is at risk is a so-called second wave of investment,worth at least $180 billion, that could almost double the LNGexport capacity.
The oil and gas majors active in Australia have been outbeating the drum of high costs recently, using an industrygathering in Perth last month to bluntly warn that unlesslabour, regulatory and other costs come down, Australia willlose out to countries like the United States, Canada andMozambique for new LNG projects.
One of the mooted solutions is switching from land-based LNGplants to huge floating platforms, moored above gas fields, butcontaining all the equipment and abilities of a conventional LNGplant, just crammed into a much smaller space.
Royal Dutch Shell has already taken the plunge,with construction of its Prelude floating LNG vessel underway inSouth Korea.
It will be the largest floating structure ever built,weighing some 600,000 tonnes, which is double the largestsailing supertankers.
Prelude will also be almost 500 metres long and is built towithstand the category 5 cyclones that occasionally strike offthe Western Australian coast, where it will be permanentlymoored.
But it's not clear that Prelude is any more cost effectivethan building land-based plants.
The estimated capital cost is between $10.8 billion and$12.6 billion for Prelude's 3.6 million tonne per annumcapacity.
This gives a cost of $3.5 billion per million tonnes ofannual LNG capacity.
This is more expensive than the three LNG plants being builton Australia's eastern seaboard that will be the first to usecoal-seam gas as a feedstock.
The Queensland Curtis project, operated by BG Group has a capital cost of $2.4 billion per million tonnes of annualcapacity, the Gladstone plant being built by Santos and Malaysia's Petronas is at $2.37 billion and the Asia-PacificLNG plant of ConocoPhillips is $2.74 billion.
However, Prelude is competitive with the land-based plantsbeing built in the north and west of Australia that draw gasfrom deepwater offshore platforms.
Inpex's Ichthys project has a capital cost of $4.04billion per million tonnes of annual LNG capacity, Chevron's Gorgon is at $3.46 billion and its Wheatstone plant isat $3.25 billion.
FLOATING ADVANTAGE IS MORE THAN COST
What these numbers show is that Shell isn't saving a hugeamount on building Prelude compared to land-based projects.
What the numbers don't show is that the Prelude field wouldnever have been developed without floating LNG, as it's toosmall and too far offshore to be viable for a conventionalplatform and sub-sea pipeline to a land-based liquefactionplant.
This is the real advantage of floating LNG. It allowssmaller, stranded fields to be developed at a competitive cost.
This is why GDF Suez and Santos are considering thetechnology for their Bonaparte field, and Exxon Mobil and BHP Billiton are doing the same for the Scarboroughreserve.
The decision by Woodside Petroleum to look atfloating LNG for its Browse field is perhaps different, as thecompany initially planned building an onshore facility, but raninto environmental objections and cost escalations to the pointwhere the economics no longer stacked up.
While floating LNG may not get around all the cost problemsassociated with doing business in Australia, it does allow thedevelopment of fields that would otherwise be uneconomic.
It's for this reason the giant vessels are more likely thefuture, rather than the problem that labour and other costs inAustralia are too high. (Editing by Muralikumar Anantharaman)
