Economic Value Chain Analysis of the

Australian Gas Industry

Nhu Che, Thuy Pham, Quentin Grafton & Matt Unicom Bureau of Resources & Energy Economics (BREE)

AARES 56th Annual Conference8-10 February, Fremantle, Western Australia

Outline

• Background of the Australian gas industry

• Key steps in developing a gas value chain model

• Key activities & flow of transformation of a gas value

chain model

• Value chain model with consideration of rapid

development of coal seam gas (CSG)

• Illustrated sources for market analysis: gas resources

in Australia, supply, demand, price etc

• Remarks

Australia’s gas resource

• Total conventional gas and coal seam gas is about

3400 bil cubic metres (bcm) (or 130,000 PJ)

• Australia’s reserve shares about 2% of the world

• Reserve life: 73 years (the world: 63 years)

• Western market: accounts for 2/3 production in

Australia); >80% total export of Australia

• Eastern market: accounts 31% of Australia’s

production; strong development of coal seam gas

• Northern market

Australia’s gas resource (PJ)

20000

40000

60000

80000

100000

120000

140000

1982 1986 1990 1994 1998 2002 2006 2010

conventional gas

coal seam gas

PJ

Source: BREE

The Australian gas industry

• In 2010–11, Australia’s total natural gas production

was about 53.4 Gm3, which increased by 9 per cent

compared with 2009–10.

• Nearly half of production is exported in form of

LNG.

• In 2010–11, Australia exported about 20 Mt of LNG,

(8.4% of the world) valued at about $10.8 billion.

• The major markets for LNG exports are Japan, China,

Korea and India.

Key steps in developing a value chain model

• Identify and map a flow diagram that captures key cross-link interactions in supply and demand that form the value chain.

• Identify and quantify stochastic characteristics of resource deposits and other uncertainties such as changes in prices, exchange rates and market conditions.

• Develop an economic model of the value chain analysis that captures stochastic, spatial and non-linear interactions through supply and value chains, and the cost and revenue components of each key linkage in the chain.

• Design data and computer programs to characterise and analyse the value chain.

Flow diagram of oil and gas value chain process

Flow of transformation

Value: appraisal

Locate:

potential

resources

Establish:

open new

areas for

exploration

Exploration:

field &

facility

development

Operation Transport

& refining Markets:

domestic

& export

markets

-Desk study

-Aerial survey

-Seismic survey

-Mapping of

resources &

environment

-Social-

economic

feasibility

-Environmental

analysis

-Government

issues licences

-Approve field

development

-Exploratory

drillings

-Appraisal

drillings

-Field/facility

development

-Oil & gas

are produced

- Production

process

-Oil & gas are

transported

to refinery

-Refined

products are

transported

-Market

analysis of

demand,

supply,

prices,

exchange rate

Flow of transformation

Key activities

Key value chain functions of

planned BREE model

• Production transformation functions for each chain, identifying key inputs and outputs.

• Cost transformation functions for each chain, identifying input prices and including other cost factors such as policy impacts.

• Revenue transformation functions for each chain, identifying output prices, exchange rates, market conditions and market uncertainties.

• Value-added transformation functions for each chain.

• The objective function of the aggregated profit function of all chains, considering regional development and other social-economic factors.

Financial value chain of oil & gas in the US

Production

Exploration

Value added= $36.70

Cost of inputs = $47.30

Transport

Refining

Distribution

Marketing

Pump tax

$2.97 +$17.78 +$1.00 +$1.90 +$0.80 +$19.15 +$3.70

$13.36 + 14.89 + $1.96 + $4.80 + $1.33 + $0.36 + $0.00

Gross margin = cost of inputs +value added = $84.00

Production & costs transformation functions

(convention gas)

F1(y1) = F1(x1) Locate

F2(y2) = F2(y1, x2, ζ2) Valuate

F3(y3) = F2(y2, x3, ζ3) Establish

F4(y4) = F4(y3, x4, ζ2, ζ3, s) Mine

F5(y5) = F5(y4, x5, s) Transport

F6(y6) = F6(y5, x6) Beneficiate

F7(y7) = F7(y6d, x7, s) Domestic markets

F8(y8) = F8(y6e, x8, s) Export markets

F9(y9) = F9(y7, y8, x9) Divest

F1-F9 is the production function of locate, valuate, establish, min, transport,

beneficiate, domestic market and export market, respectively;

x1-x9 is the set of inputs required for production of each chain from F1-F9;

y1-y9 is the set of outputs of F1-F9;

ζ2 and ζ3 present the probability of resource deposit and uncertainty of extraction

condition;

s is the spatial factor, which takes into account the location of mining business;

Output supply equals to the sum of output supply to the domestic and the export

market, or y6= y6d + y6e .

C1(c1) = C1(x1, px1) Locate

C2(c2) = C2(x2, px2) Valuate

C3(c3) = C3(x3, px3) Establish

C4(c4) = C4(x4, px4, ζ2, ζ3, s) Mine

C5(c5) = C5(x5, px5, s) Transport

C6(c6) = C6(x6, px6) Beneficiate

C7(c7) = C7(x7, px7, s) Domestic markets

C8(c8) = C8(x8, px8, s) Export markets

C9(c9) = C9(x9, px9) Divest

where C1-C9 is the cost function of locate, valuate, establish, min, transport,

beneficiate, domestic market and export market, respectively;

c1-c9 is the set of production cost of each chain from F1-F9;

px1- px9 is the set of input price of production for each chain from F1-F9.

Revenue transformation functions

R1(r1) = R1(y1, py1) Locate

R2(r2) = R2(y2, py2) Valuate

R3(r3) = R3(y3, py3) Establish

R4(r4) = R4(y4, py4, g4) Mine

R5(r5) = R5(y5, py5) Transport

R6(r6) = R6(y6, py6) Beneficiate

R7(r7) = R7(y7, py7, ζ7) Domestic markets

R8(r8) = R8(y8, py8, e, ζ8) Export markets

R9(r9) = R9(y9, py9,g9) Divest

where R1-R9 is revenue function of locate, valuate, establish, min, transport,

beneficiate, domestic market and export market, respectively;

pyi is the set of output prices for output yi, (i=1-9);

e is the exchange rates;

ζ7 and ζ8 present uncertainty of domestic and export markets;

g4 and g9 indicates the impacts of government regulations (such as for environment,

regional development etc on mining operation and divest

VA1(va1) = r1-c1 Locate

VA2(va2) = r2-(r1+c2) Valuate

VA3(va3) = r3-(r2+c3) Establish

VA4(va4) = r4-(r3+c4) Mine

VA5(va5) = r5-(r4+c5) Transport

VA6(va6) = r6-(r5+c6) Beneficiate

VA7(va7) = r7-(r6+c7) Domestic markets

VA8(va8) = r8-(r7+c8) Export markets

VA9(va9) = r9-(r8+c9) Divest

9

1

9

1

9i

i

i

i crvaVA

Total value added

Illustrated sources for

Market analysis: demand, supply & price

Australia’s gas demand (GL)

10 000

15 000

20 000

25 000

30 000

35 0001

98

9-9

0

19

90

-91

19

91

-92

19

92

-93

19

93

-94

19

94

-95

19

95

-96

19

96

-97

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

02

-03

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

Source: BREE

Gas share of energy end use in Australia (%)

16

17

18

19

20

21

22

23

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

Source: BREE

Gas demand by region &

IEA scenario projection (bcm)

1980 2009 2020 2035

OECD 959 1518 1705 1841

Non-OECD 557 1558 2183 2909

World 1516 3076 3888 4750

Share of non-OECD 37% 51% 56% 61%

IEA, World Energy Outlook 2011

OECD’s gas demand

84,724

104,724

124,724

144,724

164,724

184,724

204,724

Millio

n C

ub

ic M

ete

rs

2005 - 2010 Range 2009 2010 2011

Australian gas export

Source: BREE

0

2

4

6

8

10

12

0

5

10

15

20

25

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

Volume Value (right axis)

Principal markets for Australia’s oil & gas export

0

2000

4000

6000

8000

10000

12000

1 2 3 4 5 6 7 8 9

10

11

Japan China Korea

Gas imported in Asia-Pacific

• In 2011 Japan shared about 51% of total gas imported

in Asia-Pacific

• Asia-Pacific shares about half of total world’ LNG

import

• The average growth rate of Japan’s gas imported

during 1990-2011 is about 3% per year

•

Unit price of Australian LNG export

(A$ mil/Mt)

0

100

200

300

400

500

600

700

800

Source: BREE

Australia’s gas supply

Western market

• The most important market (2/3 production in Australia) (1359 PJ)

• All of the gas produced is natural gas with the majority offshore

• Accounts for >80% total export (the North West Shelf Project)

• The Carnarvon Basin is the most important supply source

Eastern market

• Accounts 31% of Australia’s production (622 PJ)

• About 2/3 of gas production is natural gas; 1/3 is coal seam gas (CSG)

production

• Strong increase of CSG production, from 44 PJ in 2004-05 to 200 PJ in

2009-10

Northern market

• The smallest supply (1.5 % of Australia’s production); domestic market

Gas production of Australia

Source: BREE

0

10

20

30

40

50

6020

00-0

1

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

Gm3

Productivity index of the Australian mining

industry (Fisher index)

Coal seam gas resources in Australia

Unit Australia World

CSG resources PJ 168 600 a 10240000 b tcf 153 a 9047 b Share of world % 1.6 100 CSG production PJ 139 2700 tcf 0.1 2.3 Share of world % 5.1 100 CSG share of total gas production % 8.4 5.0

a Total identified CSG resources b Total CSG resources in place c Estimate includes United States, Canada and Australia only.

Source: IEA 2009a; IEA 2009c; Geoscience Australia.

Coal seam gas production in Australia

• Over the past five years, CSG exploration has increased

substantially, providing 11% of total gas production

• 20,000 - 40,000 wells could be drilled in the next 20 years

• CSG accounts for 90% gas supply in QLD; export markets

since 2014

• CSG seems will be a key future source of gas for Australian

markets

• Controversy of sustainable development of CSG: the issues

of water use and environment

• About 7500 gigalitres of water would be extracted over 50

years (1/3 of the average annual flow of the Murray-Darling

river system) (the National Water Commission)

Remarks

• The important role of the industry: gross value, export

revenue, employment, energy sources etc

• It is important to include the environmental issue in the cost

function. E.g., the case of CSG development over the next

decades

• The draft Energy White Paper: the important role of gas & the

need for supporting the transition to lower-emissions forms of

technology.

– Australia’s per capita greenhouse gas emissions is the

highest in OECD & among the highest in the world

(Garnaut Review).

– Australia will soon have a carbon pricing mechanism in

operation toward cleaner energy sources.