* 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
By Rebekah Kebede and Sonali Paul
PERTH/MELBOURNE, Nov 20 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
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
"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
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,
"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.