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This page last up-dated: 24 May 2005
The True Value of a Timor
Sea Gas Resource
Ed
note:
Geoff McKee's analysis "How much is the Greater Sunrise really worth?"
shows that, because crude oil prices have climbed dramatically since
2002, the potential government revenue arising from a Sunrise gas
project is about four times higher
than the figures used by the oil companies and others.
Geoff’s conclusions are vital as they enable communities in East Timor,
Australia and elsewhere to appraise the actual value of the Sunrise gas
resource. Because Geoff clearly states his assumptions, these can be
used by ordinary people to evaluate the fairness or otherwise of the
Australian government’s offers to East Timor.
I have included a table of contents to enable ease in moving around
this document. Note that
the footnote is full of valuable ideas and
information. Please take a look there also.
Geoff McKee is an engineer who has been analysing oil and gas
development in the Timor Sea for many years. He currently lectures at the
School of Petroleum Engineering,
University of New South Wales in
Sydney, Australia.
He is well known for his October 2002 submission to
the Australian Parliamentary Joint Standing Committee on Treaties,
which demonstrated the economic and practical feasibility of piping gas
to East Timor for processing, enabling the new country to benefit from
the jobs and infrastructure that would come with the "downstream"
facility.
Dez Wildwood, Back Door Newsletter
See:
* “Pipeline technical
issues”
Lao Humutuk OilWeb, Ref:
Options/pipeIndx.htm.
To obtain OilWeb CD-ROM:
http://www.pcug.org.au/~wildwood/oilmajor.html
* "5.3 Pipeline issues"
in the October 29, 2002 Submission to the Australian Parliamentary Joint Standing
Committee on Treaties by G A McKee &
Associates Pty Ltd, Oil & Gas Project Development Services, Sydney,
Australia
pdf file: http://www.aph.gov.au/house/committee/jsct/timor/subs/sub87.pdf
How much is the Greater
Sunrise really worth?
A revised potential revenue estimate for a disputed gas
resource in the Timor Sea
By G. A. McKee
smokehaze@yahoo.com
March 26, 2005
Contents:
Introduction
What are the “official” statements on the value of
Greater Sunrise?
Conclusion
Footnote:
Introduction
Footnote proper
* Assumptions
* Project evaluation results
* Project economics
"If
the project goes ahead Australia and Timor Leste could expect more than
$90 billion (US$68 billion) in export revenues and about $A52 billion
(US$39 billion) government receipts (taxes and royalties) ... The
value of the field to Timor Leste must be seen as the sum total of the
upstream plus downstream benefits. The US$39 billion in
government
receipts is only half the story. Of comparible value are the downstream
benefits arising from onshore infrastructure investment." Geoff McKee, Oil and Gas engineer
Introduction
This note is aimed at clarifying
revenue predictions from a potential Greater Sunrise LNG export
project.
Rob Wesley Smith, long time Darwin-based East Timor activist, has been
pestering us to carry out a revised revenue estimate for the disputed
Greater Sunrise gas resource. What is needed it seems are some numbers
that can stand up to scrutiny. Rob is skeptical quite rightly in
my opinion - about the figure of about $3 billion reportedly being
offered by Australia to East Timor to keep their government quiet on
maritime boundaries for 100 years or so.
This valuation data is now important, since without knowing the true
value of the Greater Sunrise gas resource, people will find it hard to
assess whether or not the Australian government is making a fair and
reasonable offer.
Conclusions outlined here, and discussed in detail
in the footnote, are that potential government
revenue arising from a Sunrise LNG project are approximately four times
higher that the figures bandied about by the oil companies and those
who take such advice as gospel.
The reason for this is that crude oil prices have climbed dramatically
since 2002 when the oil companies first put the revenue estimates into
the public domain.
What are the “official” statements on the
value of Greater Sunrise?
Shell, Woodside’s partner in the Sunrise development, stated in August
2002, that quote “[a Sunrise floating LNG project] is expected to
deliver over A$30 billion in export revenues and approximately A$8
billion in taxes to Australia and East Timor” (see submission #51 to
Australia’s Joint Standing Committee on Treaties, 2002).
This figure seems to have become the “official” word on the value of
the Sunrise field, quoted in many academic papers and by media
commentators
since August 2002.
A footnote in a 2003 paper by Dean Bialek and Gillian Triggs (The
University of Melbourne Faculty of Law, Public Law and Legal Theory
Research Paper No. 45) repeated that "The Greater Sunrise reserves are
estimated to contain recoverable gas reserves of about 8.5 trillion
cubic feet and condensate reserves of around 335 million barrels,
valued at approximately A$30 billion: Government Press Kit: Timor Sea
Treaty, 20 May 2002; see also Northern Territory Office of Territory
Development, Greater Sunrise Northern Territory Oil and Gas Fact Sheet
(2002)”
Over time, such estimates, repeated often, become accepted truth by the
consensus of experts quoting each other.
More recently, in October 2004, Fr. Frank Brennan SJ recycled these
numbers in his monograph paper entitled “The Timor Sea’s oil & gas:
what’s fair?” written on behalf of the Australian Catholic Social
Justice Council:-
“The Greater Sunrise fields contain about 8 trillion cubic feet of gas
and 300 million barrels of condensate. If the project goes ahead
Australia and Timor Leste could expect more than A$30 billion in export
revenues and about A$10 billion A$12 billion in government
receipts (taxes and royalties)”, reports Fr. Brennan.
We note A$30 billion in export revenue is equal to US$22 billion, and
A$10 billion to A$12 billion in government receipts is equivalent to
US$7.5 billion to US$9 billion.
Fr. Brennan does not give the readers the benefit of any source or
basis for the data he presents, so it must be accepted as a simple
fact. Such statements issued by credible commentators can be unhelpful
to East Timor’s case for compensation.
The conclusion arising from the analysis below is that these quoted
revenue numbers are out of date, superseded by the new realities of the
world crude oil market.
Based on a crude oil price of US$50/bbl over the life of the project
we would say instead:
"If the project goes ahead Australia and Timor Leste could expect more
than $90 billion (US$68 billion) in export revenues and about $A52
billion (US$39 billion) government receipts (taxes and royalties)"
Rob Wesley-Smith wrote to the Timor Sea Justice Campaign discussion
list on Feb 7, declaring "I have published before that the “government
take” over say 30 years is more like $35bn. Does Timor Leste believe
this? Or will it be satisfied with a cash offer of an extra $3bn, for
example?"
Our figures show that these "back of an envelope" calculations by Mr.
Wesley-Smith are certainly in the right "ball park". As is not
unusual, it is the progressive activists who usually “get it right”
first, especially in the case of East Timor’s history.
Conclusion:
The revenue numbers for the Sunrise field quoted by Fr. Brennan only
look about right only if we assume a base crude oil price of around
US$20 per barrel. This assumption we now know to be unrealistic.
Many oil analysts/commentators believe the crude oil price will stay at
the high prevailing levels of close to US$50 per barrel. This is
because we are approaching the time of what is known as "peak oil" when
world crude oil production rates will start to fall for the first time
ever (in the next 20 years or so). The drastically reduced
discovery rate is not able to replace the depletion of reserves
currently occurring at the staggering rate of about 27 billion barrels
per year.
In the light of the above estimates for the Sunrise field, the A$3
billion cash offer that the Commonwealth Govt. wants to give the people
of Timor Leste - to forestall boundary discussions for 100 years - can
be seen as a paltry sum.
If the A$52 billion (US$39 billion) in government receipts from
Sunrise, as we estimate, were split 18% - 82% in accordance with the
"status quo" IUA that has already been signed but not ratified, then
Timor Leste would get A$9 billion (US$7 billion) and Australia would
get A$43 billion (US$32 billion). So a cash payment of A$3
billion to Timor Leste represents a de-facto shift in Timor Leste's
share of upstream benefits from 18% to only approximately 24%. Is
this enough to settle the issue once and for all, enabling Woodside to
move forward with development?
If Timor Leste agreed to settle for a de facto 50-50 split of upstream
benefits from a potential Sunrise project based on a US$50/bbl crude
oil price scenario, then the cash payment from Australia over the life
of the project would or should be more like A$26 billion (US$20
billion) which is a far cry from the A$3 billion on offer.
Can the value of a gas field such as Sunrise to the people of Timor
Leste be determined simply by calculating the government receipts over
the life of the field in this way?
The answer is “no”. The value of the field to Timor Leste must be
seen as the sum total of the upstream plus downstream benefits.
The US$39 billion in government receipts is only half the story. Of
comparible value are the downstream benefits arising from onshore
infrastructure investment.
A pipeline to Timor from the Sunrise field with a LNG export industry
built on the north side of the island would generate huge additional
economic benefits as a result of fixed direct investment. The
quantification of these downstream benefits has been studied in detail
by the Northern Territory government. Timor Leste must strive to
achieve these downstream benefits for her people, following the example
set by the Northern Territory government. An NT Govt. spokesman
has said that if all Timor Sea gas came ashore to Darwin it would
create directly and indirectly 12,000 jobs for Australians. [1]
It is the people of Timor Leste who really need those jobs, and the
national dignity and self-respect that goes with it - not the
Australians who are now wallowing in wealth and excessive consumerism
judging by recent media reports.
It is hoped this information will help to encourage the people of Timor
Leste to keep fighting to maximize their petroleum benefits. In this
struggle, the paper by La’o Hamutuk
[ http://www.pcug.org.au/~wildwood/lheng.html
] entitled “Saving Sunrise” [http://www.etan.org/lh/misc/04sunrise.html ] appears timely and helpful, for
it explains how Timor Leste has time on her side to achieve these
goals, without the need to hastily capitulate to pressure from
Australia.
Geoff McKee
Sydney, Australia
smokehaze@yahoo.com
http://www.petrol.unsw.edu.au/GeoffMcKee.htm
March 26, 2005
[1] Mr. Andrew Andrejewskis, for the Northern Territory Government,
page TR72, Hansard for Joint Standing Committee on Treaties, public
hearings, 3 October 2002 in Darwin.
[2] See for example the report "Gas Infrastructure Development:
Opportunities for Timor Sea Gas in Northern Territory &
Queensland", a Public Report prepared by M.J.Kimber Consultants Pty.
Ltd. for the Northern Teritory Government, 27th May 1999.
[3] See also for example “Development options for Timor Sea Gas:
Analysis of Implications for Australia”, a Report to the Northern
Territory Government, February 2002, by ACIL Consulting.
"Governments
and oil companies are reluctant to discuss their assumptions, since
this is seen as “sensitive” commercial information. As a result,
ordinary people and activists in a supposedly democratic society find
it very hard to get the information they need in order to make
reasonably informed judgments. The government of Timor
Leste currently has a large amount of very good
information delivered to it by Woodside, giving costs and benefits
relating to the construction of a pipeline to Timor from Sunrise and an
export facility in that country. Supporters of East Timor
need to know what is in these reports, in
order to calibrate their efforts to help East Timor. But unfortunately
it is difficult sometimes to find “transparency” in this business where
oil revenue is involved. Governments often want to keep information to
themselves (when it suits them) and prefer to have a band of less than
well-informed supporters that they can more easily
manipulate. The government of Timor Leste should put
Woodside’s reports into the
public domain, in the same way that the Northern Territory government
allows the public to view its similar reports [2, 3], or in the same
way that oil companies put their environmental impact statements into
the public domain to satisfy the public’s “right to know”." Geoff McKee, Oil and Gas engineer
Footnote
Introduction
What follows now is a step by step justification for our abovementioned
revenue estimates, for non technical readers. This keeps to the
principle that people should not bandy about numbers without being
clear about the basis on which they are calculated.
Those who take issue with the numbers can debate the correctness of the
assumptions that led to the result, rather than argue about the results
themselves. In this way a consensus can emerge about reasonable cost,
price & fiscal assumptions to employ in any analysis. Given
the same input data, most company, government and private economic
evaluation spreadsheets will give the same results.
Governments and oil companies are reluctant to discuss their
assumptions, since this is seen as “sensitive” commercial information.
As a result, ordinary people and activists in a supposedly democratic
society find it very hard to get the information they need in order to
make reasonably informed judgments.
The government of Timor Leste currently has a large amount of very good
information delivered to it by Woodside, giving costs and benefits
relating to the construction of a pipeline to Timor from Sunrise and an
export facility in that country.
Supporters of East Timor need to know what is in these reports, in
order to calibrate their efforts to help East Timor. But
unfortunately it is difficult sometimes to find “transparency” in this
business where oil revenue is involved. Governments often want to
keep information to themselves (when it suits them) and prefer to have
a band of less than well-informed supporters that they can more easily
manipulate.
The government of Timor Leste should put Woodside’s reports into the
public domain, in the same way that the Northern Territory government
allows the public to view its similar reports [2, 3], or in the same
way that oil companies put their environmental impact statements into
the public domain to satisfy the public’s “right to know”.
What we have is an “LNG plant in Timor” impact statement that the
government of Timor Leste chooses to keep under wraps. Thus their
supporters in Melbourne and elsewhere do not know how to judge the
issue on its merits.
My recommendation to activists to lobbying the Australian government
for a better deal and at the same time lobby the government of Timor
Leste to release the Woodside report.
For those who are not aware, this report, is believed to have been
issued by Woodside to the Timor Leste government around mid-September
2004. It is understood to have three parts, plus an overall
"executive summary":
Part 1. Pipeline from Sunrise to two possible locations in Timor Leste,
done by Intec Engineering.
Part 2: Technical and costing analysis for an LNG facility in Timor
Leste, done by Bechtel.
Part 3. Broader issues of environment, infrastructure, economic
impacts, done by ConocoPhillips
Footnote proper
Barrel of oil equivalent (boe)
1 barrel of oil has the energy equivalent of about 6,000 standard cubic
feet (scf) of natural gas. Therefore we can express quantities of gas
as "barrel of oil equivalent" or 'boe'.
1 scf of natural gas has the energy content of about 1,000 British
Thermal Units (BTU). 1 BTU is the amount of energy needed to raise the
temperature of 1 pound of water by 1 degree Fahrenheit.
1 boe has the energy content therefore of 6 million BTU. This is
useful to know, because as we will see below, the price of liquefied
natural gas (LNG) is normally expressed in the world market as US$ per
million BTU. However to keep things simple we will express the
price of LNG in terms of US$ per boe.
Converting the Sunrise resource into boe.
1 trillion cubic feet (1 tcf) of natural gas = 1 million million scf of
natural gas i.e. (10 raised to the power 12) cu ft of natural gas.
You can show that 1 tcf of gas = 167 million boe and therefore 8 tcf =
1.34 billion boe (to be sold as liquefied natural gas (LNG) in the case
of the Greater Sunrise field)
1 barrel of condensate can be taken as 1 boe, therefore 300 million
barrels of condensate = 300 million boe = 0.3 billion boe.
The Greater Sunrise field contains therefore 1.34 + 0.3 = 1.64 billion
boe.
A barrel of crude oil is currently worth over US$50.
Therefore over the life of the Sunrise field, if all this energy were
produced, and sold at the prevailing energy value of crude oil, then,
by inspection, the total paid by the customer would be expected to be
in the order of (1.64 billion boe) x (US$50/boe) = US$82 billion
dollars, present day value.
That is the gross expected sales revenue at the end of the
transportation line (e.g. as paid by customers in Japan or the USA in
the case of Sunrise gas). All the initial costs of investment in
exploration, production facilities, wharfs, ocean tankers, together
with ongoing operating and maintenance costs of production and
transportation need to be deducted to find out what is left over for
the companies and governments to share as their final "booty". It
is the split between the companies and the governments share that is
often the cause of a lot of fuss by the companies who need to get a
reasonable return for their shareholders in order for the project to go
ahead.
What the companies end up with is then further taxed by the government.
Price of Sunrise condensate and LNG
The price of condensate (from gas fields, sometimes called natural
gasoline) can be taken as the same as that of crude oil.
But is the gas (LNG in this case) worth as much as crude oil, on an
equivalent energy basis?
It can be shown from published data that the “CIF” (all costs including
freight) price of LNG in Japan is very close to the price of crude oil
in energy terms. We subtract about US$9 per boe (US$1.50 per million
BTU) for the cost of transportation from Sunrise to Japan or the US,
including the cost of re-gasification in those countries, to get the
price of LNG at the export loading facilities of the future Sunrise
project.
We then use this FOB (“free on board”) price at the point of ship
loading to work out the export sales revenue.
Revenue calculations for a potential Sunrise LNG project
Below are results derived from one particular set of assumptions for a
potential Sunrise LNG project. You can vary these assumptions depending
of what scenario you are investigating. Therefore results are not
"carved in stone", only "indicative". They will give a rough indication
of the costs and revenue breakdown involved in such a project.
The scenario that follows is for a fixed offshore platform at the
Sunrise field with condensate offloading facilities, and feeding gas
into an deepwater pipeline to Timor, with onshore pipeline to a
liquefaction plant on the north side of the island. Other scenarios are
floating LNG facilities or a gas pipeline to distant Darwin instead of
nearby Timor.
But it is the first scenario that is important for Timor Leste.
Assumptions:
1. Fiscal regime: Australian PRRT (this
is less "onerous" from the companies perspective than the Timor Leste
PSC regime i.e. a somewhat
lower "government take")
2. Gas reserves: 7.68 tcf
3. Condensate reserves: 299 million
barrels
4. Exploration and appraisal cost: US$250
million
5. Total capital cost (drilling,
processing facilities and pipelines) : US$3.7 billion
6. Operating costs: US$45 million/yr
7. Start production: 2010
8. Abandonment cost: US$150 million
9. Abandonment year: 2035
10. Base crude oil price: US$50 per barrel
11. LNG
price (FOB ex liquefaction plant):
US$41 per boe
12. Condensate price: same as base crude oil
price
Project evaluation results (figures are real, unescalated):
1. Cumulative gross sales revenue,
received by combined upstream and downstream project: US$68 billion
(US$43/boe)
2.
Government take: US$25 billion
(US$16/boe)
3. Capital expense: US$3.7 billion
(US$2.34/boe)
4. Operating costs: US$1.2 billion
(US$0.74/boe)
5. Abandonment and salvage: US$150
million (US$0.09/boe)
6. Net cash flow to companies before tax:
US$39 billion (US$24.50/boe)
7.
Income tax paid : US$14 billion
(US$8.80/boe)
8. Net cash to companies after tax: US$25
billion
9. From above, total government receipts
= US$25 billion + US14 billion = US$39 billion.
Project economics (from companies perspective):
1. Net cash flow to companies after tax,
discounted at 10%: US$6 billion (US$3.80/boe)
2. Project rate of return: 29%
(i.e.,”windfall” profits for the joint venture partners at the
forward-looking US$50/bbl scenario)
Sensitivity to price of crude oil
What if the base price of crude oil were assumed to be only US$25 [or
US$20] per barrel?
In this unlikely future scenario, if we re-ran the numbers the US$68
billion in export revenues now becomes US$28 billion [or US$20
billion], and the US$39 billion government receipts reduces to US$14
billion [or US$9 billion]. The figures in [parentheses] are for the
US$20/barrel crude oil case.
The US$20/bbl crude oil price assumption gives us revenue estimates
similar to those reported by Fr. Frank Brennan.
[ends]
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