Let's Talk Cost Base

[Tree]

Factoids on Break Even Costs covering capex and opex with a 12% ROI:

Aussie LNG gas cost of $8+/M 

PNG LNG's gas cost of $7.5/M 

IOC's gas cost of $.7/M

Jobama's average LNG cost for June was $17.277/M

IOC's gas cost based on FLEX/EWC provided facilities at no cost overruns for IOC.  IOC's gas costs will go up if land based stick built is chosen.

Any wonder why healthy bid process is reported??  The deal will bigger than we have dared suggest as IOC is trading way below NAV and has so much profit to the upside.  Shell just starting to figure this out??

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-- Australia has highest LNG cost base in the world -Shell Exec

-- Rising construction and labor costs may threaten new investment -Shell Exec

By Stephen Bell

PERTH--Royal Dutch Shell PLC's (RDSA) top executive in Australia warned Wednesday that rising construction and labor costs in the country may threaten new investment in the expanding liquefied natural gas sector.

The Australian LNG industry has "probably the highest cost base now" anywhere in the world, Shell Australia Chairman Ann Pickard told an industry conference.

Australia has close to a dozen giant gas export projects in the pipeline, putting strain on local labor markets and raising the risk of cost blowouts. Shell is partnered with PetroChina Co. in the Arrow Energy joint venture, which is planning to build an LNG terminal in Queensland state. Shell also owns 25% of Chevron Corp.'s $43 billion Gorgon LNG development in Western Australia.

Some of the costs are due to the high dollar, but Australia also needs to look at the "broader investment conditions" for companies like Shell, she said.

"If we can't keep the prices down and we can't find a way to improve the productivity, onshore LNG plants will become increasingly difficult to build," she added.

Separately, Shell is building its Prelude floating LNG facility offshore Western Australia.

Approved in May 2011, Prelude remains "on schedule and on budget", Pickard told reporters at a media conference following her speech.

The first steel for the hull of the giant vessel, designed to chill natural gas for export at sea, will probably be cut in September in South Korea and relocated to Australia ready for production in 2016, she said.

Shell has agreed to sell a combined 32.5% participating interest in Prelude under separate agreements to Inpex Corp., Korea Gas Corp. and CPC Corp., with divestment proceeds expected later in 2012.

Asked whether Shell might sell more equity in the project, Pickard said that she is "happy" with the current ownership structure.

[admin]

Although I've been wondering about the viability of all these Aussie projects for years (especially after reading that the Conoco/Origin project needs to drill, treat and man 20,500 wells or so), with a globalizing LNG market, it puts a floor under LNG prices. In oil (already globalized), the floor is the cost base of the marginal producers, any reason to think this will be different in LNG when the globalization process is in its advanced stages (this is some way off, but still)..

[Tree]

It's looking like an LNG floor will not exist.
IF JP/SK succeed in de-linking LNG from oil parity pricing and US Shale boom yields LNG projects Aussie projects will be at risk. The tipping point for projects will be ability to compete with US shale, and those costs are substantially less than Aussie's. The future may be in upstream ownership rather than strictly sales as a result.

[ValueSleuth]

It's looking like an LNG floor will not exist. IF JP/SK succeed in de-linking LNG from oil parity pricing and US Shale boom yields LNG projects Aussie projects will be at risk. The tipping point for projects will be ability to compete with US shale, and those costs are substantially less than Aussie's. The future may be in upstream ownership rather than strictly sales as a result.

As pointed out in the recent Economist article on NG/LNG, it will take many years for Henry Hub gas to significantly alter the current pricing mechanisms in a material way.

The higher cost Aussie projects are in trouble just on the basis of non-US LNG projects, as long as the vast majority of LNG pricing is by linking to the world price of crude oil.

In any event, the InterOil resources are GOLDEN given their finding cost.

....and ff Henry Aldorf gets his way -- perhaps on some facilities IOC eventually builds per Henry's Gulf plan -- the profits will just gush to IOC.  I definitely expect this on one or more of the eventual number of reef structures to be found on InterOil acreage.

VS