Arrow LNG a likely target in Shell spending rethink

Tue Nov 12, 2013 9:48am EST

* Dropping Queensland export project could save $5 billion -analysts

* New Shell CEO could choose to tap into nearby BG plant instead

* U.S. shale gas expansion threatens LNG projects worldwide

By Andrew Callus

LONDON, Nov 12 (Reuters) - The Arrow gas export project in Australia is a likely casualty of a tighter spending regime at Royal Dutch/Shell as the company's new boss considers feeding output earmarked for it into a rival plant instead.

Industry sources say the move could be among the first actions of Ben van Beurden. He inherits a recent promise to invest with care when he takes over as chief executive on Jan. 1, and is due to outline his strategy on March 13.

"We will need to make some hard choices over the next few quarters between the best new investment opportunities from this emerging portfolio.... This is as much about what we choose not to do as what we choose to do," chief financial officer Simon Henry said at Shell's Oct. 31 presentation of quarterly results.

The world's top international oil companies are under pressure to keep a lid on spending, whose growth has outpaced production and profits in recent years.

Shell is spending more than $40 billion a year and is seen as among the least willing to rein in its investment plans. Analysts say it could save about $5 billion by cancelling Arrow LNG based on a rough $10 billion building cost estimate for the plant, which would be shared equally with partner PetroChina.

"Anything due for FID (a final investment decision) in the next couple of years is in the front line, and Arrow is certainly one to kick into the long grass," said a source with knowledge of Shell's decision-making set-up.

Another source, who has worked with Shell but did not know whether any decision has already been taken, said a likely alternative might be to feed gas from Arrow's Surat and Bowen basin fields in Queensland into BG Group's QCLNG gas export plant, some 15 kilometres from Arrow's own planned site.

QCLNG expects its first Liquefied Natural Gas (LNG) tanker to sail in the second half of next year.

Diversion of Arrow's gas could be achieved as a tolling agreement, under which Shell contracts BG or another nearby plant to liquefy its gas, one source said. But analysts note that BG already has enough gas for its two-train QCLNG plant so, as part of any deal, Shell might consider taking a stake in a third train BG has among its future potential investments.

Shell and BG both declined to comment. BG earlier this week finalised a deal that secures it some QCLNG financing from its Chinese partner CNOOC.

NEW GENERATION

Arrow Energy is one of a new generation of LNG schemes in Australia's north east that are fed from Queensland coal seam gas (CSG) and piped to liquefaction plants at the coast.

Three liquefaction plants, QCLNG, GLNG, and APLNG, are already under construction adjacent to each other on Curtis Island to receive the CSG, and industry experts, critical of a lack of co-operation, have questioned the economics of a fourth.

Local conditions are not the only consideration. LNG project managers worldwide are hesitating as U.S. shale gas threatens their market. No liquefaction projects outside the United States have won FID for almost two years.

GLNG is being developed by Australian group Santos and Malaysian state group Petronas, while APLNG is a joint venture of ConocoPhillips and Australia's Origin Energy . Shell's Arrow would be a fourth plant on the island and a fifth, Liquefied Natural Gas Ltd's Gladstone LNG, is also under consideration.

The concentration of LNG engineering efforts both in this region and in the country's northwest has ramped up industry cost inflation - even though this year's mining slump has cooled the pressure somewhat.

Questions have also been raised about whether there will be enough gas to supply all the projects over the long term.

A year ago, Shell was already citing cost overruns elsewhere in Australian LNG, and saying there was "no rush" to take FID on Arrow. In February, CEO Peter Voser said Abadi, a floating LNG project in Indonesia where Japan's Inpex is the operator, "may well be Shell's next LNG project".

Arrow was not mentioned at all in Shell's October third quarter results presentation to investors and analysts.

"Arrow has been developing its upstream gas reserves with a view either to construct its own LNG facility or to sell the gas into one of the three existing projects. If it chose the latter option, it wouldn't come as a big surprise," said analyst Neill Morton of Investec. "...Any resulting capex savings would likely be taken positively."

Despite all the doubts, LNG in Australia, coupled with its Gas to Liquids (GTL) developments, remain a big and lucrative part of Shell's business.

LNG and GTL earned Shell $9 billion in 2012, 40 percent of its bottom line. Australian LNG coming on stream in the years up to 2017 will increase its LNG capacity there by 30 percent and a further 20 million tonnes a year "under study" - including Arrow - could add a further 70 percent after 2017.

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