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LNG billions: is Australia getting a good deal from the Gorgon Project?

September 14th, 2009 · Greg Atkinson · 26 Comments

Recently there has been a lot of joyous reporting about the massive Gorgon Project and the expected boost that the Australian economy will get from  multi-billion dollar LNG export contracts. However is Australia really getting a good deal for it’s LNG and as a nation, are are we tapping into all the benefits we should be getting from this massive project?

Firstly we need to understand that the Gorgon Project is not “ours” as such. The Government might get excited about deals to sell LNG to China, Japan and South Korea but these are deals between the partners in the Gorgon Project (suppliers) and the buyers of the LNG. (customers)

“Australia” and the “Gorgon Project” are not interchangeable terms and do not mean the same thing.

The Gorgon project is a joint venture between three global energy giants:

  • Chevron – 47.75% stake.
  • ExxonMobil – 25% stake.
  • Shell – 25% stake.

Tokyo Gas (1%) and Osaka Gas (1.25%) also have small stakes in the project after buying a share in the project from Chevron. This sale is subject to approval by the Foreign  Investment Review Board (FIRB) but this is not likely to be a problem.

Therefore when politicians or reporters talk about multi billion dollars deals to sell LNG overseas the truth is that the deal is not between Australia and these overseas companies at all.  The deals are made between the major partners in the project and the buyers, on commercial terms set between those parties.

When the Australian Prime Minister says “‘It has been a great four weeks for Australia’s LNG sector” it really means it has been a great few weeks for …..Chevron, ExxonMobil and Shell.

The media has been at time sloppy when reporting anything to do with LNG recently. For example reporters often seem to confuse deals done between the major Gorgon Project partners and overseas buyers as deals between Australia and these customers, they are not.

For example on September 10th,  Chevron put out a press release: Chevron Secures Multiple Gorgon Gas Sales Agreements To Key Markets in Asia. Dutifully much of the media basically rehashed the headline numbers and the deal was suddenly heralded as another triumph for Australia.

But let’s be clear once again, this deal is between Chevron Australia, a wholly owned subsidiary of Chevron (Headquartered in San Ramon, California) and buyers in Japan and South Korea. In addition the deal with GS Caltex Corporation in South Korea is for gas from “the Gorgon project and from other system gas within the global Chevron portfolio”

So it is not a totally Australian deal at all as some of the gas may be sourced from outside Australia. In addition it is interesting to note that the company buying the gas in South Korea is 50% owned by Chevron. Seems Chevron is the big winner with this deal.

Trying to get a big picture view of the overall project numbers is difficult but I have been able to pull together the figures below from various press releases and media reports:

  • Total sales in the first twenty years expected to be around $300 billion.
  • Expected Federal and State Government revenue of about $40 billion. (according to the 30 year economic plan)
  • Around $33 billion to spent on local goods and services. (over 30 years)
  • $64 billion net (in today’s money) boost to Australia’s Gross Domestic Product. (GDP) (I assume this is over 30 years)

If the sales revenue in the first 20 years is expected to be $300 billion then perhaps the project will generate sales of around $400 billion over 30 years. (a conservative figure if all goes well)

However what we need to bear in mind is that this revenue is not Australia’s as such, this is money that will flow to the major partners in the project, none of which are Australian owned entities.

So what is our direct share? Well I have seen the expected Government revenues expressed as either up to $40 billion or about $40 billion over 30 years. There is a big difference between the two but let’s factor in a win for Australia and say our share will be $40 billion.

By looking at the raw numbers it appears we (Australia) have sold our rights to about $400 billion dollars of LNG for $40 billion.  So the question is: did Australia get a good deal by  selling our LNG for a 10% cut of the revenue?

Of course the revenues figures are estimates at this stage and according to a article in the Sydney Morning Herald: Gorgon signs $70b deal

“Doubts have been raised about the headline figures for the Gorgon LNG deals. A recent Goldman Sachs JBWere report listed current LNG prices at about $US322 ($A374) a tonne. Forecasts for 2014, when the project is expected to start exporting, are about $A450 a tonne. Using $450 a tonne values the three deals at about $32 billion.

To generate a figure more than double that, even allowing for the 2.25 per cent equity interest, would mean the Government is forecasting oil prices, from which the LNG price is calculated, to skyrocket.”

So according to Goldman Sachs JBWere the $70 billion dollars in sales recently announced may end up bring in as little as $32 billion. I would guess if this were to eventuate that Government Revenues would also fall so perhaps we might all be getting a bit carried away with Gorgon mania?

The companies involved in developing the Gorgon Project will have to pump in billions of dollars before the first shipments of LNG will start around 2014, so they are talking on significant risks. Therefore I have no problem with them trying to maximise returns for their shareholders, that is after all what companies are suppose to do. But who exactly is out there maximising the returns for Australia?

I assume that since I keep reading about $50 billion dollars being invested in the Gorgon Project that this covers all construction costs and equipment. Since much of the equipment used in the project will be imported I would guess the main benefit to the Australian economy (in addition to Government revenues) will be the around $33 billion (expected) to be spent on local goods and services.

But what this number will not include is:

  • Investment in the ships to transport the LNG from Australia to the markets in Asia. These ships will be built (or already have been built)  in countries such as South Korea, Japan, China, France and even Norway.
  • Much of the advanced technology and equipment as this will be imported.
  • Most heavy construction machinery as once again this will be imported.

Once again this highlights that Australia is not moving up the value chain apart from providing engineering services. We have simply sold a patch of land, will provide most of the workers and then sit back and let corporations from other countries tap into profits that we should perhaps also be having a share in.

I am not saying the Gorgon Project is a bad deal, but what I am suggesting is that Australia is once again not using it’s resources as a means to move up the value chain and develop new industries.

Why doesn’t Australia for example have the capacity to build the ships to transport our own products to our export markets? Instead of just being a major supplier of LNG why can’t we also be a major supplier of LNG tanker vessels as well? How many extra jobs would this create?

Yes the flow on economic benefits to Australia from this project will be welcomed, but could we as a nation have done better? Did we really get the best deal for our LNG?

Personally I think we  should be using our strength in resources to push ahead into other related industries in order to diversify our economy. LNG, iron ore and coal etc. might be pushing our economy along for now, but can we be sure that in 20 years that this will still be the case?

If the revenues from our commodities exports falter sometime in the decades ahead what is Australia’s fall-back plan? It seems at this stage we don’t have one, so perhaps we should be using ventures such as the Gorgon Project much more wisely and be seeking a better deal for Australia’s future.

26 responses so far ↓

  • 1 flawse // Sep 29, 2009 at 8:06 pm

    We are on a treadmill. We must continue to sell our assets at a faster and faster rate to stand still.
    We have had negative, after tax real interest rates for something like 50 years that I know of. So we have no savings, large personal debts and most of our resources already sold to Foreign owners.
    Australia’s handling of the LNG industry is in stark contrast to Brazil’s handling of its deep oil discoveries. These have been virtually quarantine for development by Petrobras the Brazilian Oil Company.
    Our politicians can’t wait to get their hands on more money to spend to make themselves appear ‘good’.
    Australians are strange. We seem to think that all these foreigners who save and then come and invest here do so because they like us, and so they ‘give’ us money.
    The payment of interest and repatriation of dividends is already a major factor in our CAD, We are already borrowing to pay the interest on the interest. But even worse we are selling (have sold)our heritage.

  • 2 Greg Atkinson // Sep 29, 2009 at 8:26 pm

    flawse you are right, we are on a treadmill. As you mention Brazil is a good example of how to manage resources as is Norway & Statoil.

    We seem to bend over backwards to sell off our natural resources and we will end up buying energy sourced from Australia from foreign corporations.

    The other very Austrlaian thing we do is not value add, we just ship the raw materials off (and think we are getting a bargain) and then buy imports made from our own raw materials, where the cost of the raw materials we sold is recovered many times over. Now how stupid is that!

  • 3 flawse // Sep 30, 2009 at 1:22 am

    Brazil’s idea

    Brazil’s new resource policy has already sent efficientarians into gruff, neo-classical orbit. They’re predictably irked that Brazil no longer intends to extract its oil as quickly as possible at current market prices! Now the South American giant has additional gravel to drop on the heads of economists: it’s decided to build all its future drilling rigs at home:

    Asian yards miss out on Petrobras drillship contracts – Rio De Janeiro: Asian shipyards are to lose out on a lucrative offshore opportunity in light of the news that that Brazilian oil company Petrobras is to hand out around $9.8bn in chartering costs to offshore operators for expensive drillships – but only if they are built in Brazil. –SeaTrade Asia Online, 11 September 2009

    Brazil sourced its previous (and current) rig building contract the old fashioned way: by making a global tender. But given the capacity of Brazilian shipyards, myriad other resources found in Brazil, and especially the ability to make the full range of specialty metals, why not build all the drill rigs and drillships at home? Fabricado em Brasil, in contrast to Ricardian comparative advantage, will make economists very unhappy. As Brazil intends to spend at least 175 billion over the next 5 years developing offshore oil, making western economists unhappy (who neither understand oil) is not such a bad thing.

  • 4 flawse // Sep 30, 2009 at 9:34 am

    I hope this does not come up twice as I tried to post it earlier.

    Greg have you seen this? The implications are quite staggering!
    Martin Ferguson is a consumate ass!

    Chevron Australia CO2 Liability Deal May Be Precedent

    Sept. 18 (Bloomberg) — Chevron Corp., Exxon Mobil Corp. and Royal Dutch Shell Plc agreed to invest in the $37 billion Gorgon natural gas venture only after Australia’s government assumed liability for potential damages hundreds of years from now. That may set a precedent in this resource-rich nation.

    The three oil companies said Sept. 14 they will proceed with the liquefied natural gas development, the continent’s biggest single investment, at Barrow Island off the northwest coast. The national and Western Australia state governments removed a key obstacle last month when they accepted “any long term liability” should carbon dioxide captured from the project escape sequestration, or storage, two kilometers underground.

    “Letting taxpayers ultimately take responsibility for any problems with the CO2 sequestration is a calculated risk by the government,” said Craig Wallace, a senior associate of Lavan Legal in Perth who has advised companies on Australia’s draft climate-change legislation.

    “It sets a precedent. It’s probably very likely other operations would get on the bandwagon.”

    Gorgon is the largest of 10 proposed LNG projects that Resources and Energy Minister Martin Ferguson says will make Australia “an energy superpower.”

    The project’s importance in creating wealth, jobs and investment justified government acceptance of liability…

  • 5 Greg Atkinson // Sep 30, 2009 at 9:48 am

    flawse, thanks very much for the info about Gorgon & the C02. I have actually been thinking about who was responsible for the C02 that will be hidden, now the question has been answered.

    Martin Ferguson is a complete dill, it just goes to show how our politicians have no idea how to get a good commercial deal for the nation.

    Great, so the companies get the LNG dollars, dig the country up, make a bundle then leave us with the problem of what to do with the C02. What happens if it starts to leak out? Well I guess that will now be up to taxpayers to sort out. So we have sold our stake for maybe 10% cut of the profits and assumed a big chunk of risk that will be around for hundred of years.

    But can you find anyone in the mainstream media who questions the the Gorgon deal or in the Federal Opposition for that matter?

    Thanks also for the information about Brazil..are you trying to make me cry? 🙂

  • 6 flawse // Sep 30, 2009 at 10:02 am

    Sorry Greg!

    I was thinking more about the CO2 – the deal might be a reflection of what these companies, who probably know a thing or two about inground storage of gases, think of the technology!
    Chin up!

    One more thing…I have not seen this Co2 thing reported at all in Aus MSM….what the hell is going on in this country?
    I’ll send it to Michael West and see if he knows anything about it.

  • 7 Greg Atkinson // Sep 30, 2009 at 10:30 am

    flawse I think the companies involved would be well aware that implementing any new technology is risky and even more risky to guarantee it will hold up for decades. I just cannot believe the State and Federal Governments agreed to this! At least we could have secured a bond or something.

    Michael West is one of the good journalists out there, I like a lot of his work. Hope we has something to say on the subject.

  • 8 flawse // Sep 30, 2009 at 3:40 pm

    Michael is in editing now. However it seems he had seen nothing about this.

  • 9 Greg Atkinson // Sep 30, 2009 at 7:18 pm

    flawse it is amazing how little attention these major resource deals get. Nobody seems too worried if we are getting a good deal as long as jobs are created. Where is the long term view?

  • 10 flawse // Oct 1, 2009 at 12:02 pm

    Link to NYT article featuring Brazil’s philosophy on developing its deep sub-salt oil.
    It’s a lot different to the approach taken by Australia.

  • 11 Greg Atkinson // Oct 1, 2009 at 4:41 pm

    flawse interesting..thanks for the link. By the way, what is Australia’s approach to managing our resources? Do we have one? 😉

  • 12 Greg Atkinson // Oct 7, 2009 at 7:38 am

    Even Mongolia seems to manage it resources better than us. Here is how a new gold and copper mine will divide up the profits as reported in the SMH today: “Mongolia will own 34 per cent of the mine and receive a $US250 million ($A284.9 million) advance payment against royalties and taxes under the agreement signed by its ministers for finance, mining and the environment and executives of Rio and Ivanhoe.”

    So they will get 34% of the profits, plus they will take an upfront fee! I wonder if we can get their team over to Oz to handle our resource agreements?!

  • 13 Greg Atkinson // Nov 20, 2009 at 9:16 am

    It has only take a few months but at least I have found one reporter in the mainstream media questioning how good a deal the Gorgon Project really is for Australia:

    I wonder how much of Australia’s resources boom is heading overseas?

  • 14 Ned S // Nov 20, 2009 at 10:08 am

    Underdeveloped nations can afford to be a bit tougher re terms maybe – As in their populations and pollies aren’t addicted to the good life yet? Whereas lifestyle addicted tartlets like Oz just don’t feel we can afford to be too choosy.

  • 15 Greg Atkinson // Nov 21, 2009 at 6:38 pm

    Ned I guess we believe we have enough natural resources to go around? I wonder if in he rush to get rich we are going to make things harder in the future for the next few generations?

  • 16 Ned S // Nov 22, 2009 at 4:42 am

    Barring genuine productive tech breakthroughs of various sorts (and I don’t count banks coming up with more sophisticated financial fiddles as such), I’d expect things to be harder on the next few generations Greg – Globally competitive world with more people playing the “let’s compete” capitalism game – Just makes sense there’ll be a bit less for “us” what are at our zenith and a bit more for them that aren’t I guess? Problem is people don’t want to hear that. And economists seem to think they can weave some financial wizardry to avoid it – Silly buggers!

  • 17 Greg Atkinson // Dec 28, 2009 at 9:59 am

    Ned I just read an article about some South Korean companies getting the contract to build four nuclear power plants in the UAE. This is exactly what Austrlaian companies could be doing if we developed a nuclear industry in Oz. We need to move up the value chain!

    Oh and by the way, if we went nuclear we would also reduce our C02 emissions as opposed to trying to hide them under a rock. (a solution by the way that has few friends at the U.N it seems)

  • 18 Ned S // Dec 28, 2009 at 8:47 pm

    No arguments at all Greg. Australia just strikes me as such a strange little country – Is parochial the right word?

  • 19 Greg Atkinson // Dec 30, 2009 at 10:15 am

    Ned that seems exactly like the right word. I think Australians are also starting to feel the nation is “bullet proof” (economically speaking)and that may set us up for a nasty reality check someday.

  • 20 Greg Atkinson // Jan 5, 2010 at 10:52 am

    By the way, here is a timely warning about counting on resource deals too early. Seems PetroChina have had enough:

  • 21 Greg Atkinson // Oct 11, 2016 at 11:17 am

    Well now around 7 years later the mainstream media have finally woken up..after some prodding.

    Turnbull government called on to explain where Australia’s offshore gas wealth is going

  • 22 lachlan // Oct 19, 2016 at 11:05 am

    Wasn’t sure what to make of all that Greg.
    Having a good day with these though
    Nice piccys

  • 23 Biker // Oct 19, 2016 at 12:12 pm

    Personally, I found your insights extraordinary and prophetic, given the context of the times. *

    I hadn’t see this article, written 14/09/09 before. I suspect I was O/S(?)

    * In the West, the anti-fracking movement has become ‘un cause celebre’.
    John Butler’s concert was an instant sellout (dammit!)… and (probably noticing this) the state Labor opposition has sworn to ban fracking if elected.

  • 24 lachlan // Oct 20, 2016 at 4:21 am

    I hadn’t read everything either. I have now plus comments. Greg was all over that one for sure. Otherwise the political philosophy, nationalism, internationalism I wont go there. Why is this so? Because the local land pirates aren’t as well organised as the sea going pirates.

  • 25 Greg Atkinson // Oct 25, 2016 at 11:02 am

    I’m not sure quite what we do wrong with managing resources in Australia but we do seem to get less return for them than other nations seem to do. Maybe because it’s because effectively each state is involved in setting the terms for resource projects? I also wish we would channel some of the returns into a sovereign wealth fund which could be used to fund education and healthcare for example. Oh well..there’s no use dreaming 🙂

  • 26 Biker // Oct 26, 2016 at 8:47 am

    Greg: “I also wish we would channel some of the returns into a sovereign wealth fund which could be used to fund education and healthcare for example.”

    Totally agree. We’re very low-on-the-list of nations which commit to this. Unfortunately common sense isn’t all that common… .

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