It didn’t take Woodside Petroleum long to come to the obvious conclusion that if it wanted to develop its Browse Basin gas resources it had to seriously evaluate the potential of Shell’s pioneering floating LNG technology.
Only about a fortnight ago Woodside announced that it would no longer proceed with the proposed, and highly controversial, onshore development of an LNG facility at the environmentally sensitive James Price Point in the Kimberley region of Western Australia.
Given the sensitivities, and the prospect that the $45 billion project’s cost could, like most of the LNG plants now under development, blow out considerably and leave Woodside with a high-cost project just as new lower-cost supply of LNG enters the market, the decision to shelve the onshore development was a prudent and pragmatic one.
At the time Woodside said it would immediately engage with its joint venture partners and recommend the evaluation of other development concepts.
The obvious alternatives, despite the insistence of the Western Australian government that it wanted the project at James Price Point to secure the massive investment, jobs and taxes that it would generate, were Shell’s FLNG technology, a pipeline to link the fields to the existing North West Shelf LNG facilities or a much smaller onshore development at James Price Point.
Today Woodside said it had entered an agreement with Shell that set out the key principles that would apply if the browse resources were developed using Shell’s technology and that it would immediately engage with its joint venture partners in relation to the agreement and the extent of work on alternative development concepts.
Shell is constructing the world’s first FLNG processing facility – in effect a 500 metre or so ship – to exploit its own Prelude gas field in the Browse Basin. The technology has the potential to develop fields earlier and at a far lower capital cost than conventional technologies.
Its use for the Woodside development would, of course, mean the jobs and investment involved in the construction phase would shift offshore, probably to South Korea, and Woodside and its partners would have to pay Shell, one of the joint venturers, for access to the technology. That might not endear Woodside to the Western Australian government but it would at least see the fields developed within a reasonable timeframe.
Timing is important given that the three big coal seam gas-fed LNG plants in Queensland will start producing LNG for export from 2015 and then continue to ramp up production. Towards the end of the decade it is also conceivable that there could be significant exports of LNG into the Asia Pacific market from the US as its shale gas sector continues to grow.
Woodside would want, and need, to get the Browse gas into the market as early as possible and off the lowest cost base possible to ensure that it has secured customers and can withstand the impact of the lower prices that would flow from the entry of north American gas into the market or, as Japanese customers are arguing, the de-linking of LNG from oil prices with the pricing set in future by reference to US Henry Hub domestic prices.
Last year Shell conducted an asset swap with Chevron that saw it emerge with Chevron’s 17.5 per cent stake in the Browse project, lifting its direct interest to 27 per cent at a time when the joint venture partners were disagreeing about the best development option.
That was, correctly it appears, interpreted as a sign Shell foresaw the conclusion that the James Price Point option would be uneconomic and that the Browse partners would inevitably turn to the FLNG technology.
Woodside hasn’t actually ruled out other options but its chief executive, Peter Coleman, did say FLNG had the potential to commercialise the Browse resources in the earliest possible time frame as well as further building its relationship with Shell, Woodside’s largest shareholder.
The timeline for Shell’s Prelude development would suggest it would take about five years from a final investment decision to have an FLNG facility at Browse up and running, which perhaps explains why Woodside, after ditching the James Price Point option, was happy to announce a special dividend and say it was targeting a dividend payout ratio of 80 per cent for the next several years.