How Browse could float WA's boat

Woodside Petroleum’s Peter Coleman must sometimes think he’s living in a different universe to that of his state government.

This week a West Australian parliamentary committee tabled a 500-odd page report on the economic impact of floating LNG technology on the WA economy and came to the obvious conclusion that it would cost the state jobs and revenue.

The committee was also critical of the decision by former resources minister Gary Gray to vary the conditions of the retention leases for the Browse project off WA to allow FLNG technology to be used to develop the resource. There has been talk of a challenge to that decision.

The report forms part of the continuing resistance to FLNG by the WA government, which is still advocating an onshore gas hub at the environmentally sensitive James Price Point.

The problem for the government is that Woodside, after an exhaustive and very expensive analysis of the onshore option, came to the conclusion that the project would cost about $80 billion.

Given the recent history of LNG developments in WA, Woodside’s estimate could be conservative.

Chevron’s Gorgon, originally budgeted to cost about $US37bn is now estimated to cost at least $US54 billion, with some of the Gorgon partners fearing it will end up closer to $US60 billion.

By contrast, the use of Shell’s FLNG technology could halve the cost of exploiting the Browse reserves and, because it would allow the Browse joint venturers to develop the fields sequentially, significantly lower the risks relative to an onshore project by spreading out the capital commitments over time.

The commercial reality of an onshore development for Woodside, which has a market capitalisation of about $35bn, is that its share of the project costs (about $25bn if the James Price Point option had been exercised) would have seen it putting its viability at risk for project that would be sub-economic at best.

The WA government’s concern about the introduction of FLNG off its coast is understandable. If FLNG is used to develop Browse and proves a commercial success, there is a lot more gas off WA that would be exploited using the technology. That’s a lot of prospective jobs and flow-on economic benefits and access to gas for domestic use that would be foregone.

The brutal counter-argument, however, is that without FLNG Browse, other fields off Western Australia might never be developed. There would no gas and therefore no jobs and economic benefit.

The escalation in the cost of developing LNG off Australia has been occurring even as the structure of the LNG market is evolving.

Demand within Asia continues to increase but there is an ever increasing threat of new supply from North American unconventional gas. The US has given a green light to a succession of export LNG projects based on the shale gas revolution that will compete with the Australian projects at prices based on US domestic Henry Hub gas prices, potentially de-linking Australian LNG from oil prices.

WA did get some good news on Browse this week. The national offshore petroleum titles administrator is re-drawing the boundaries between state and Commonwealth waters in a fashion that would probably double WA’s share of the largest of the three main Browse fields, the Torosa field, from about 15 per cent to about 30 per cent, if not more.

The WA government appears to see that as giving it more leverage to force Woodside and its partners back to an onshore development, or at least a commitment to putting some aspects of the project (like a support base) onshore.

The change in boundaries, however, would substantially increase the state’s royalty income from the project at the Commonwealth’s expense. Development of Browse, by whatever technology, would become even more compelling for the state.

The FLNG technology has the potential to allow development of a considerable amount of gas off WA that might otherwise by stranded by the sheer capital costs and risks associated with such remote resources and the tendency for the cost of these projects to blow out dramatically.

It could help significantly improve not just the viability and returns of future Australian offshore LNG projects, but also their competitiveness in an evolving market for LNG.