Browse blow-up delivers an awkward epiphany

Given the controversies, and the exits of a number of the original interest holders last year, Woodside's decision to ditch the proposed $45 billion onshore development of its Browse LNG project in Western Australia comes as no surprise.

Last year Chevron (through an asset and cash swap with Shell) and BHP Billiton sold out of the project and Woodside itself sold down its interest amid simmering tensions between the project partners about the best way to develop it.

The West Australian government, and Premier Colin Barnett in particular, has been insistent that there is only one option for development. It wants processing to occur onshore at the environmentally-sensitive James Price Point in order to secure the investment, jobs and taxes that would flow.

Woodside said today, however, that having completed its technical and commercial evaluation of the proposed James Price Point development it had determined that the development concept did not meet its commercial requirements for a positive final investment decision.

It said it would immediately engage with its joint venture partners and recommend evaluation of other development concepts to commercial the Browse gas. It said these could include floating technologies, a pipeline to the existing LNG facilities in the Pilbara or a smaller onshore option at James Price Point.

Shell has been strongly advocating the use of its floating LNG processing technology (which it is using at its Prelude project off Western Australia) as a way of significantly reducing the capital cost of developing the Browse resources. Others see a linking of the project to the existing North West Shelf project infrastructure as a viable alternative.

It will be interesting to see if Colin Barnett maintains his hitherto intractable position that the gas has to processed onshore at James Price Point if there is a serious question mark over whether Browse will be developed at all.

There is real concern within the sector about the extraordinary levels of cost escalation that have been occurring within what are already mega-projects with massive budgets. Chevron, for instance, announced last year that what had been budgeted as a $US37 billion Gorgon LNG project was now estimated to cost $US52 billion.

Cost inflation, delays created by green and red tape and the strength of the Australian dollar are all undermining the economics of resource projects generally, with the sheer scale of the LNG projects magnifying the impacts on their competitiveness.

There is also concern, albeit not yet alarm, at the structural changes occurring within the region’s energy markets (referred to earlier today – see Rio's canary for Australia Coal, April 12 – in relation to energy coal).

Directly, through exports, or indirectly through its impact on other energy resources and their pricing, the US shale gas revolution will impact the economics of LNG and therefore the developers of existing LNG projects, and those considering new developments, are acutely aware of the need to minimise their capital and operating costs to ensure the projects are viable in the long-term.

The producers are also aware of the pressure, at this stage mainly from the Japanese, to change the way LNG is priced, de-link it from oil prices and effectively price it in relation to the US Henry Hub domestic gas prices which are being increasingly driven by the influence of surging shale gas production.

If any of the US shale gas is to find its way into Asia in meaningful volumes (the US is still considering whether to approve any of the 18-odd applications to build export LNG terminals against the backdrop of fierce lobbying from US manufacturers against LNG exports) it probably won’t be until the end of this decade at the earliest.

There is an opportunity, with whole-of-government co-operation, an intense focus on costs by the producers and the use of lower-cost technologies and development options to get the current wave of projects under construction and consideration into the market, lock up long-term contracts with customers and start generating attractive returns on the investments before the threat posed by a US energy surplus materialises.

The Browse announcement adds some urgency and focus to the debate about the necessity of a coordinated and urgent effort to improve national productivity and competitiveness.