Australia: FLNG in the Greater Sunrise Basin - can Gary Gray make a difference?

The story of Floating Liquefied Natural Gas (FLNG) processing got a boost last month with the appointment of Gary Gray, a former Woodside executive, as the new Federal Minister for Resources and Energy. With his deep knowledge of FLNG, Mr Gray brings new hope that the six-year deadlock over the massive Greater Sunrise Basin gas field may yet be resolved.

The use of FLNG processing platforms has recently become a topic of intense debate, one that garnered nationwide attention after Woodside Petroleum shelved its $50 billion plan to build an onshore gas processing facility at James Price Point. The proposed plant, 60 kilometres from Broome on the West Australian coast, was intended to process gas mined from several Woodside tenements in the Browse Basin. Woodside is now looking at alternatives, including FLNG.

FLNG platforms replace the traditional onshore process of natural gas liquefaction. Rather than piping gas to a processing plant on land, an FLNG platform performs the processing offshore, on an enormous floating vessel near the point of extraction.

FLNG has many benefits. Significantly for gas producers, it eliminates the need for expensive pipelines to the coast and significant onshore infrastructure. Beyond reducing project costs, it also avoids much of the unwanted criticism associated with the environmental and social impact of onshore processing (particularly by avoiding the need for coastal development and resolving native title issues).

However, not everyone is a supporter of FLNG. Unions and state governments have expressed deep concerns that FLNG eliminates the economic benefits of onshore processing, notably the increased demand for labour and loss of State royalties. West Australian Premier Colin Barnett is one staunch critic of FLNG processing. He described Woodside's decision to abandon the James Price Point plant as a 'tragedy' for WA and those indigenous inhabitants set to receive financial support packages.

The fervent debate over FLNG is playing out in different ways, in different regions. Shell for instance has successfully commissioned the construction of a 448-metre long, 74-metre wide FLNG platform to process gas at its Prelude gas field (also in the Browse Basin), 200 kilometres off the West Australian coast. The platform is currently under construction in South Korea and expected to commence operations in 2016, after being towed to the gas field and moored to the ocean floor.

While FLNG processing is a foreseeable reality in some parts of the Browse Basin, the situation is starkly different in the Greater Sunrise Basin (GSB), where the Timor Leste government and Woodside continue to be locked in a six-year stalemate over how to process subsea extracted gas.

Though the Australian Federal government has remained tight-lipped on its preference for either FLNG or onshore processing (despite the benefits that would accrue to the Commonwealth for processing on the Australian mainland), Timor Leste has been far more vocal in its preference for processing within its borders. It argues the GSB is only 150 kilometres from the Timor Leste coastline and onshore processing offers enormous benefits to the country's southern region. Woodside's current preference is to process the gas offshore and avoid the high costs of piping gas across a deep ocean trench.

Gas extraction in the GSB and the apportionment of royalties are dealt with in the Certain Maritime Arrangements in the Timor Sea treaty, which was signed by the Australian and Timor Leste governments in 2006.

Importantly, the treaty provides that if a mining development plan for the GSB is not approved by 23 February 2013, then either country can terminate the agreement. While that date has come and gone without a resolution to the current impasse, to date neither country has signalled an intention to withdraw from the arrangement.

Tellingly, two days before the 23 February deadline, Martin Ferguson, the then Minister for Resources and Energy, travelled to Dili in an attempt to resolve the impasse. Mr Ferguson was subsequently (and somewhat infamously) replaced as Minister for Resources and Energy by Gary Gray, an ex-Woodside executive and known supporter of FLNG processing, before a deal could be reached. It is hoped that Mr Gray's understanding of FLNG and, in particular his knowledge of the GSB, will assist in bringing about a much-needed end to the deadlock. Woodside has publically given itself a one-year window to work out a deal.

The remaining issue for the Australian government to contend with is the negative publicity created by State governments and other parties who see FLNG processing as a threat to jobs. While the environmental benefits of FLNG processing are readily apparent, the criticism may prove an unnecessary distraction for a government wanting to avoid further controversy in an election year.

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