* Dropping Queensland export project could save $5 billion
* New Shell CEO could choose to tap into nearby BG plant
* U.S. shale gas expansion threatens LNG projects worldwide
By Andrew Callus
LONDON, Nov 12 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.
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.