April 12, 2013 2:54 am

Woodside to rethink $45bn gas proposal

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Woodside Petroleum headquarters©Bloomberg

Woodside Petroleum, Australia’s biggest oil and gas company by market value, is to examine other development concepts for its US$45bn Browse liquefied natural gas project in a remote part of Western Australia after its initial plan was judged to be uneconomic.

“A tender evaluation has recently been completed for all upstream and downstream scopes of work, which showed that the development would not deliver the required commercial returns,” Woodside said in a statement.

Woodside said it would “immediately engage” with the project partners, which include Royal Dutch Shell, to “recommend the evaluation” of other concepts to develop 15.5tn cubic feet gas in the Browse basin. These will include floating LNG technology, piping gas to an existing plant on the mainland and a smaller onshore processing facility.

“The cost escalation on Browse has been consistent with other projects in Australia,” said Peter Coleman, Woodside chief executive. “Unfortunately cost escalation has been such that the total costs for Browse have resulted in the current development concept not being commercial.”

The decision by Woodside not to proceed with the development of an onshore processing and export facility at James Price Point, north of Broome, is the latest sign of stress in Australia’s burgeoning LNG industry.

Spiralling labour costs and the strong Australian dollar, which hit a 28-year high on a trade-weighted basis this week, have seen the budgets for several LNG projects blow out by billions of dollars. In December Chevron, the US oil and gas company, said the budget for its Gorgon LNG venture had increased 40 per cent to US$52bn.

There are currently seven LNG projects, worth almost $200bn, under development in Australia, which is expected to overtake Qatar as the world’s biggest supplier of natural gas by the end of the decade.

However, analysts and industry executives say a second wave of developments and project extensions, worth more than A$100bn, are being threatened by the strength of the domestic currency and high input costs.

Australia is also facing competition from new LNG supplies based in Canada, east Africa, the Mediterranean and the US.

Tony Regan, LNG consultant at Tri-Zen International in Singapore, said the decision to scrap the original Browse development plan was inevitable.

“Browse was the most expensive proposed project in the world [per million tonnes of annual capacity],” he said. “It just wouldn’t have been possible to go ahead in the current guise. The impact on Woodside’s share price would have been significant.”

Last year saw a major shake-up of the interests in Browse, with BHP Billiton and Chevron selling their interests. They had both opposed the construction of a processing facility at James Price Point, arguing the gas should be sent to an existing plant at Karratha.

Shell, which tripled its stake in the project when it acquired Chevron’s interest in August, wants Woodside to process gas from the Browse basin at sea using giant floating facilities.

“We believe Shell’s floating LNG technology is the fastest, most economic and the best technical solution available for Browse,” Ann Pickard, the chair of Shell Australia, said in a statement. “Floating LNG can bring significant long-term, sustainable jobs to Western Australia.”

Floating LNG (FLNG) is seen as having several advantages over traditional development concepts. The platforms – six times the size of the world’s largest aircraft carriers – can be manufactured and assembled in more cost-effective locations. There are also no land access issues and fewer secondary costs, such as the need to build housing for workers in remote areas.

JPMorgan recently estimated Woodside could lop US$9.5bn off the development budget for Browse by switching to FLNG.

“I don’t think the other options would really result in a reduction in unit costs of production. We are probably talking A$30bn max for FLNG at Browse. It is a substantial cost saving,” said Mr Regan.

However, FLNG is not popular with the state government in Western Australia, which fears it will miss out on economic benefits if the gas is processed offshore.

“The wide range of options they have suggested may just be a sop to Colin Barnett [the premier of Western Australia] to say that we are still looking at other options that could include onshore liquefaction,” said Mr Regan.

Mr Barnett said he was “incredibly” disappointed by Woodside’s decision.

“I remain very strongly in support of that gas coming onshore at James Price Point,” he told local media. “If the project goes ahead offshore, and I certainly don’t want to see that, it’s still a project that would [bring] significant benefits to Western Australia,” he said.

Shares in Woodside rose 2.3 per cent to A$36.08 on Friday morning.

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