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 Australian…..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.