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Tales from the Trenches - Go big, or go home: the APLNG megaproject

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Megaprojects capture people's imaginations. From the ancient Pyramids of Giza, to the Great Wall of China to the more modern Panama Canal and 163 floor Burj Khalifa, mankind has always sought to push the limits of engineering and be the one to build the next 'biggest thing'. While Origin Energy's APLNG project might not carry the historic or aesthetic appeals of more famous megaprojects, it remains worthy of the moniker.

  • At an estimated total cost of $23bn, it would currently buy a large part of Sydney's CBD
  • At 9 million tons of LNG per annum the name plate capacity would fill the Melbourne Cricket Ground 25.5 times, produce the equivalent energy of 140 WW2 atomic bombs, and provide enough gas for 26,000,000 average Australian households
  • Three, 300 meter long LNG tankers each weighing more than a US aircraft carrier and carrying enough gas to supply 167,000 Australian households for a year will dock each week

Few people would dispute these numbers as being 'mega'. How did it all come to be and what did we learn from our expedition to the project in Queensland?



What is Coal Seam Gas (CSG)

CSG is extracted from coal beds through gas wells. The gas is pressurised and held in the coal seam with groundwater. Normally when the seam is pierced both gas and water will flow due to pressure. Typically CSG wells expel large quantities of water with minimal gas until the well is 'de-watered'. Over time, water flow declines and gas production significantly increases. CSG is different from 'conventional' gas with conventional typically extracted from sandstone rock formations that are usually found at much deeper depths, and at much higher pressures than CSG. Typically, CSG is 'cleaner' than conventional gas however with a higher methane content and less impurities that require treatment.

Origin Energy and CSG

Origin Energy first entered CSG in the mid 1990s (at the time part of Boral). In the 90s the emerging industry had a poor reputation as being difficult to develop and uneconomical. Early pioneers lacked suitable technology and initially tried to adapt USA designs domestically. Undeterred Origin continued to accumulate exploration permits in the Bowen and Surat Basins in Queensland amassing considerable acreage for next

to nothing. Over the next four years the advancement of CSG extraction technology would provide a renaissance and QLD production boomed from 2 Billion cubic feet (Bcf) in 1998 to almost 25 Bcf in 2002, enough to power 1.1m households (although in practice a lot would go to industrial users).

Origin continued to invest in developing extraction and production facilities, building on the experience base and continuing to amass exploration acreage. By 2008 Origin had amassed a substantial gas reserve that at the time could fulfil Australia’s east coast gas demand from ~20 years alone. The problem Origin faced was effectively monetising this vast resource.

A big resource stranded in a small market

In Japan the average household pays around 4 times more for gas than the average Australian, with Japanese gas priced at ~$14.5 Gj vs. ~$4.5 Gj in Australia. China is paying up for gas in an effort to double the energy source’s share from 5-10% by 2020. China and Japan offered demonstrably larger markets at prices significantly higher than the domestic market. The only problem was how to transport the product.

LNG, a cool way to move gas

Liquid nitrogen gas (LNG) is often considered a relatively new technology. Its origins however can be traced back to the 19th century when Britain Michael Faraday experimented with liquefying various gases. A German engineer Karl Von Linde constructed the first liquefaction process in 1873. The first plant of scale was built in the US in 1917. It would take until 1941 before commercial operation of LNG would begin however. In 1959 the international LNG market commenced in the hold of The Methane Pioneer, a converted WW2 freighter, that transported LNG from the US to UK. From the 1960’s growth in the industry was rapid with Algeria being a major exporter of LNG to Europe in the early days. More recently Qatar, Indonesia and now Australia are major players.

LNG can be a compelling proposition due to the compression ratio of up to 600 to 1. An Olympic sized swimming pool filled with LNG once ‘regasified’ would have the same volume as more than two Empire State Buildings. LNG achieves this compression through a liquefaction process. As gas cools it becomes increasingly dense. An LNG plant uses a three stage propane, ethylene and methane process to cool the gas from ambient down to -150c. The ability to vastly compress gas and transport it as a liquid to markets many times Australia’s size, and receive a price multiples higher than if Origin were to sell it in Australia.

Gas wells, brine ponds, LNG trains; all in a day’s work

A core part of our investment process is ‘getting out of the office’ and the APLNG site tour promised to provide significant insights. A 4.30 am start signalled the commencement of day 1 that would cover the upstream project incorporating a flyover of the gas operations, bus tour of the Condabri construction area including wellhead, water treatment and gas facilities. On hand was 6 senior Origin and APLNG executives that provided many opportunities for detailed discussion on how the project is proceeding, key milestones to watch and challenges being overcome. One key impression was the depth of talent working on the project, and generally with corporate leadership we’re not easily impressed. Day 2 covered the downstream project or the actual LNG plant on Curtis Island. The plant itself is a vast steel labyrinth with workers busily attaching equipment like a giant lego set. The key modules, some of which are four stories high, are assembled in Thailand and shipped by barge.  

The 2014 tour provided a wealth of insights on the project’s fundamentals and importantly how the crucial construction phase is proceeding. The key takeouts were: progress appears ‘on track’ but challenges remain. Well dig rates and gas flow rates are promising. Engineering the downstream project is complete with piping and wiring now to take centre stage. The quality of senior management is very high, and Origin have a top tier partner in ConocoPhillips that brings a wealth of experience to the project. With first LNG expected in mid-2015 the project is entering a crucial phase and our level of confidence and understanding has been buoyed by attending the tour.


This article has been prepared by Philo Capital Advisers Pty Ltd ABN 70 119 185 974 AFSL 301808 (Philo) and contains general investment advice only. The information in this article does not take account of your objectives, financial situation or needs or those of your client. Before acting on this information readers should consider whether it is appropriate to their situation. We recommend obtaining financial, legal and taxation advice before making any financial investment decision. To the extent permitted by law, neither Philo nor any of its related entities accepts any responsibility for errors or misstatements of any nature, irrespective of how these may arise, nor will it be liable for any loss or damage suffered as a result of any reliance on the information included in this article. The information in this article is based on information obtained from sources believed to be reliable and accurate at the time of publication but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. Past performance is not a reliable indicator of future performance. Any forecasts included in this article are predictive in character and may be affected by incorrect assumptions or by known or unknown risks and uncertainties. Nothing in this article shall be construed as a solicitation to make a financial investment.

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Mark Cox, Listed Equity Portfolio Analyst

Mark is an equity analyst in the Listed Securities Department for Philo Capital Advisors.

His duties involve fundamental research of listed security investment opportunities. This role involves making recommendations on the composition of a number of portfolios. His current coverage responsibility includes stocks in the Financial and Industrial sectors, and the listed income or hybrid security sector.

Prior to working at Philo Mark was employed at Centric Wealth in a similar capacity.  Earlier in his career Mark worked for a high net worth financial advisory firm as an investment analyst and private client portfolio manager. Mark has a Bachelor Degree in Commerce from the University of Canberra, and is pursuing level 3 of the Charter Financial Analyst certification.


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