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ROYAL Dutch Shell is reviewing the ownership structure of the planned $20 billion Arrow coal-seam gas export project in Queensland as cost blowouts continue to plague the sector.
The oil and gas giant has begun talks with third parties to help it develop the project but says it may delay approval as it waits for the overheated construction market to cool.
Arrow is an equal joint venture with China's PetroChina.
Shell, which has long been warning of high costs for local LNG projects, has also told investors to expect a hefty cost blowout on the Chevron-operated $43bn Gorgon project being built in Western Australia and not to expect first LNG in 2014.
The comments will fuel speculation of partner discord and a looming $20bn blowout when Chevron announces the findings of a cost and schedule review early next month.
With China already represented through PetroChina, Shell may be in talks with potential gas buyers, such as Korean or Japanese utilities.
It may also be considering combining with one or more of the three LNG plants already in construction on Gladstone's Curtis Island. These are being built for a combined $70bn by BG Group, Santos-Total-Petronas and Origin Energy-ConocoPhillips.
All of those sites have space for extra LNG trains -- which would reduce Arrow's cost -- and are facing big cost pressures. The BG and Santos projects also appear to be short of gas to run at full capacity in their early stages.
At an investor day in New York, Shell oil and gas production chief Andrew Brown said cost pressures in Queensland could delay the timing of a final investment decision (FID) on Arrow.
It has previously said it is targeting approval next year.
"There is no rush for us to enter an FID, and we'll time this with local market considerations and potentially combine with third parties," Mr Brown said.
"With three projects under construction at Curtis Island, it makes sense to think about the best value solution for Shell and get the timing right."
The company said it was "assessing options with third parties".
Shell projects and technology chief Matthias Bichsel said the company was not "rushing into new final investment decisions in Australia, for instance at Arrow".
The talks come as Origin Energy and ConocoPhillips try to sell down a 15 per cent stake in their $20bn Australia Pacific LNG project and BG Group last month agreed to sell a 20 per cent stake in its Queensland Curtis LNG plant to China National Offshore Oil Co in a $5bn deal.
Mr Brown said Shell had always been more conservative than Chevron on the costs and timing for Gorgon, of which it owns 25 per cent.
"When Shell took FID on Gorgon in 2009, we had assumed a higher budget than the $US37bn described by Chevron, the operator, and a later start-up schedule than the first gas in 2014 that was expected," he said.
"Today, our cost estimates are higher again than our assumptions at FID, and we remain conservative on the start-up date."
Chief financial officer Simon Henry said the actual spending commitment on Gorgon had already approached the $US37bn ($35.6bn) figure Chevron had said the total project would cost.
It is understood the Gorgon joint venture partners, who also include ExxonMobil, are discussing a blowout on the project that could be up to $US20bn on an original budget of $US43bn.
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This post deserves another look.
I have to believe as these aussie lng facility costs rise compared with IOC low mcf finding/processing costs
Interoil becomes a prime target for a shrewd buyer . Not predicting anything just thinking outside the box.
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UPDATE 1-Shell may feed Arrow gas into rivals' Australian LNG plants
Tue Nov 20, 2012 2:35am EST
* Final investment decision likely delayed for Arrow LNG
* Shell may sell gas to rivals' LNG plants
* Cost blowout still an issue -source
* Decision not to move forward with plant would be prudent -analysts
By Rebekah Kebede and Sonali Paul
PERTH/MELBOURNE, Nov 20 (Reuters) - Royal Dutch Shell may delay a final decision on whether to push ahead with its Arrow liquefied natural gas plant in Australia as it considers feeding its gas into other LNG projects in the area due to rising costs.
The Arrow LNG development, slated to be built in partnership with PetroChina, is one of four projects on Australia's east coast that aim to pump gas from coal seams to export facilities, all of which have faced significant cost increases and development challenges.
"There is no rush for us (to make) a final investment decision, and we'll time this with the local market, and potentially combine with third parties," Shell oil and gas production chief Andrew Brown said, according to the transcript of a briefing the firm held for investors in New York late last week.
Earlier this year, sources said that the cost of the Arrow LNG project in Queensland may have increased to $34-$36 billion from the $24-$26 billion initially touted.
Skill and equipment shortages, community opposition and a stubbornly strong Australian dollar have jacked up construction costs.
"With three projects under construction at Curtis Island (in Queensland), it makes sense to think about the best value solution for Shell and get the timing right," Brown said, adding that permitting, infrastructure and development bottlenecks had added to costs.
Arrow LNG and Royal Dutch Shell were not immediately available for comment.
A source familiar with the situation said the developers are concerned that Arrow LNG's coal seam gas supplies will not be adequate to justify the downstream investment, citing widespread public opposition to coal seam development in Australia.
A final investment decision on the project is likely to be made at the start of 2014, rather than in 2013 as previously planned.
NO SURPRISE
Shell's comments did not surprise industry watchers who have been expecting the Shell-PetroChina joint-venture to eventually shift plans away from building a plant or at the very least postpone Arrow LNG's development.
The move to delay the facility and possibly sell the venture's gas to its rivals may be the most prudent option, experts said.
"It never made sense to have four projects, and it makes even less sense now," Johan Hedstrom, an analyst with Bell Potter Securities, noting that some of the increase in cost has been due to competition for the same resources.
Geoff Barker, a partner with Resource Investment Strategy Consultants in Perth, said Shell's decision to push back the development was rational given the overheated LNG development market in Australia as well as risks that have pushed costs up for other projects.
"Shell could actually be a significant beneficiary of taking a more measured approach," Barker said.
"They do have other investment options globally."
COAL SEAM GAS STRUGGLES
Other Queensland LNG project owners have been scrambling to sell down stakes in their projects to spread risk and reduce their costs, with industry experts speculating that cost pressures may deter the expansion of existing projects.
BG Group sold a 40 percent stake in its Queensland Curtis LNG development earlier this month to China's CNOOC Group for $1.93 billion.
Origin Energy and Conoco Phillips are each looking to sell down 7.5 percent stakes in their Australia Pacific LNG project, to cut their holdings to 30 percent each, having already sold a 25 percent stake to China's Sinopec .
Brown also confirmed that Shell faces a big cost hike and possible start-up delay at Australia's biggest LNG project, Gorgon, operated by Chevron.
"When Shell took FID on Gorgon in 2009, we had assumed a higher budget than then $37 billion described by Chevron, the operator, and a later start-up schedule than the first gas in 2014 that was expected," Brown said.
"Today our cost estimates are higher again than our assumptions at FID, and we remain conservative on the start-up date," he said.
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Huh, Costs matter I guess. Quick, call Lakeside! Aussie LNG projects may make the perfect short!
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Australia LNG story is 'done': Asian LNG expert
Published 5:22 AM, 21 Nov 2012 Last update 5:22 AM, 21 Nov 2012
Australia may not see any more new liquefied natural gas (LNG) projects for many years – save perhaps Arrow Energy Ltd's Queensland venture – as the United States, Canada, Tanzania and Mozambique surpass Australia in the LNG sector, one of Asia's top LNG consultants has warned, according to The Australian Financial Review.
“For now the Australia story is done,” said Fereidun Fesharaki, chairman of FACTS Global Energy, according to the AFR. “Everything that ought to be done is being done. All of the things which have not been done will have to wait.”
The comments reflect growing concern that the approximately $150 billion of pending LNG projects that have yet to secure final go-ahead for construction may not be built for years, if at all, due to cost blowouts and sharply rising competition from other LNG markets worldwide.
The stark warning comes as Australia has a record seven LNG projects currently under construction with long-term sales contracts with customers in Japan, China, South Korea and India, but the cost blowouts and delays facing those projects make Australia less appealing for companies scouting global locations for new projects.
In addition, gas buyers are increasingly seeking lower-cost markets for their supply contracts, which has them looking to North America and east Africa.
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Here is the problem that no one wants to admit & why IOC needs to get the ball rolling NOW & stop haggling over the prices:
Here is a quote on East Africa:
"Yet forecasts of first gas from Mozambique by 2018 and Tanzania within a decade seem ambitious, with most global LNG plants delayed, some even scrapped, and more hurdles likely in getting a frontier gas market like East Africa off the ground.
"In my estimates, I don't have LNG from those countries by 2020. It's impossible to do it in those time frames," said Thierry Bros, an analyst at French bank Societe Generale and author of the book "After the U.S. shale gas revolution".
Here is one on US LNG:
"The DOE is currently in a holding pattern on these export permits, awaiting the results of a study on what gas exports will do to the domestic natural gas market. Currently, only Cheniere Energy's (NYSEAMEX:LNG) application to export LNG from a terminal at Sabine Pass in Louisiana has been approved. There are about 15 total other permit applications outstanding."
My point is while these articles mention looking to East Africa & the US it is very likely these plants won't be coming online for 8-10yrs. If Aussie projects are too expensive then either 1)Prices are going to continue increasing due to lack of supply 2) they are going to have to find new cost effective projects
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'the problem that no one wants to admit & why IOC needs to get the ball rolling NOW & stop haggling over the prices:'
C'mon Tx. There's a big difference between .5$ and .6$/m and I for one am glad IOC is holding out!
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