Foreign investors will decide fate of Arrow LNG project
THE fate of more than 3500 potential jobs in Gladstone will be on the line in boardrooms in China and the Netherlands in the next six months.
Arrow Energy is awaiting a decision on whether its proposal for an 18 million tonne per annum LNG plant on Curtis Island is palatable to the Federal Government.
But there are rumours swirling that when Arrow presents its final business proposition to Netherlands-based Shell and China-based PetroChina (co-owner of Arrow Energy), the multinationals may not find it so acceptable.
In fact, Shell has openly talked about the possibility of using its gas from the coal seam gas fields of the Bowen and Surat basins to help expand one of the other projects on the island.
The closer the stand-alone project gets to a self-imposed final investment decision, the more it seems it is being squeezed from two sides.
Global investors have become increasingly nervous about the cost of building such mega-projects in Australia, and this may be turning off decision-makers.
Geoffrey Cann, an analyst with consultancy Deloitte, who is consulting with Arrow, said Australia had become the most expensive place in the world to build.
"The comparisons suggest a greenfield in Australia these days is north of $1500 per tonne and it's only going up," Mr Cann said.
They're all timed to finish at different times, so those workers will dissipate into the economy gradually
He said construction of potential projects in the US had reached $600-$900 per tonne in comparison.
Mr Cann said the cost of greenfield construction (a project from scratch) had become so high in Australia that global gas players were starting to look at other options around the world.
The cost of construction in Australia is something Shell has long grumbled about.
In fact, the timing of its project had been designed to take advantage of what it saw as a cooling off in construction costs, as other LNG projects drew to a close.
But on the contrary, Mr Cann suspects there won't be a dramatic drop in costs as the other Curtis Island projects wind up.
"They're all timed to finish at different times, so those workers will dissipate into the economy gradually," he said.
"So it's not like there's going to be a massive drop in the cost of workers. Not as much as one would suspect, anyhow."
There is also an evolving school of thought that Arrow is facing an uncertain time in getting a good price for its product, making concerns about costs doubly worrying.
For an LNG project to go ahead, a lot of the gas needs to be pre-sold.
Arrow has not locked down any of its gas sales yet, while the other projects on Curtis Island have binding contracts.
Most of Australia's LNG makes its way to Japan, Taiwan and South Korea - with an enormous appetite for gas driving the price in Japan to about $18 per million British thermal units (mmBtu).
That price, coupled with the enormous demand for gas, has driven the Gladstone projects so far.
But the so-called "shale gale" industry in the US has sent a shiver up producers' spines.
The controversial hydraulic fracturing method of gas extraction has opened up whole new reserves of gas.
In fact, so much so, the price has collapsed to as low as $2.30/mmBtu.
With the diving price, producers have looked for a way to access an $18/mmBtu market and started lobbying the US government to build its own LNG plants.
Meanwhile, Japan has been lobbying the US government to allow expanded exports from the US.
Some observers fear this could have an enormous diluting effect on the market Arrow is trying to tap, but others say this fear is unfounded.
"It's easy to say that if Henry Hub is $2.30 and Japan is $18, therefore there's about $16 up for grabs," Mr Cann said.
"Not really, I don't think. Once you factor in all the costs to get the gas over there, it's not $16.
"In the end, you're only playing with a couple of dollars."
Still, it's an unknown.
And with new competing gas supply coming from places such as east Africa, Canada and even Russia, the outlook may be entirely too uncertain for proponents to throw billions of dollars at it.
At the end of the day, Shell and PetroChina seemingly face two choices:
1. Either build the project, optimistic about project costs and the pricing outlook; or
2. Put gas into one of the other projects, saving money on construction but cutting off a longer-term growth option.
While Shell and PetroChina weigh up the options, Gladstone residents are left watching and waiting, wondering whether they should get ready for another round of LNG growth in the region.
- 50:50 joint venture between Shell and PetroChina
- Four trains totalling 18Mtpa
- Each train able to process 4-4.5Mtpa
- Current cost of $17.4 billion
- Peak construction workforce of 3715 people
- 600 operational jobs
Arrow LNG timeline:
January 2009: Shell acquires a 30% stake in Arrow Energy's gas fields
February 2009: Shell investigates land on Curtis Island for possible LNG plant
December 2009: Land acquired for Shell Australia LNG Project
August 2010: Shell and PetroChina form a 50:50 joint venture to take over Arrow Energy
August 2010: Arrow LNG project announced
September 2013: Queensland government approves Arrow LNG project
October 2013: Federal environment minister extends window for approval to December 13
End of 2013: Final investment decision due
2014: Construction on first two trains due to start
2017: First LNG shipments due
- Source: Shell/Arrow Energy