Woodside Petroleum's Browse LNG project could end up being developed in a lower-cost environment after 2014, now that the joint venture partners are aligned for the first time, analysts at the Hong Kong office of Bernstein Research said in a note Tuesday.
The Woodside-operated Browse LNG joint venture underwent considerable restructuring over the course of 2012, with Japan's MIMI paying $2 billion for a 14.7% stake, Shell taking over Chevron's interest via an asset swap, and BHP Billiton selling its 10% to PetroChina for $1.63 billion. BP also holds a minority stake in the project.
"While costs remain a potential barrier to commercial development, there are alternatives (floating LNG) and cost inflation for LNG projects is likely to peak this year which could mean lower costs for development post-2014," Bernstein said. "We do not believe that PetroChina and MIMI would have paid what they did if the project was unlikely to have a commercial solution."
Woodside has been planning to develop the Browse joint venture's offshore gas resources to supply a 12 million mt/year LNG project, to be located at James Price Point in Western Australia's Kimberley region. The partners' resource totals 15.5 Tcf of gas and 417 million barrels of condensate, held in the offshore Torosa, Calliance and Brecknock fields.
Woodside is currently evaluating tender bids and undertaking an assurance process to determine costs and economics for the project, with a view to making a final investment decision in the first half of 2013. Bernstein is assuming the project will cost $46 billion to develop.
The Browse joint venture was last year granted a one-year extension of its government-imposed deadline to formally approve an LNG project based on its offshore gas fields. The original deadline was set by the Australian federal government in 2009 under the terms of lease renewal conditions, which required the joint venture to spend A$1.25 billion ($1.31 billion) on front-end engineering and design, and to take FID on the proposed LNG project by the middle of 2012.
The Western Australian state government has designated the greenfields site on James Price Point in the Kimberley region as a processing precinct or hub for all the gas to be developed in the offshore Browse Basin. Under its retention lease conditions, the Woodside-led joint venture was required to build its onshore liquefaction facilities at James Price Point, unless it could demonstrate an alternative development concept was likely to be commercially viable at an earlier time.
The James Price Point site is in an environmentally and culturally sensitive area, however, and has been mired in controversy over recent years as some local landowners have refused to support a A$1 billion social and economic benefits package signed in mid-2011 by Woodside and the Goolarabooloo Jabirr Jabirr native title claimant group. The location of the gas processing hub has also been criticized by environmental activists.
Chevron and BHP Billiton had in the past expressed reservations about the viability of the James Price Point development proposal. Since Shell raised its stake in the project last August, local industry watchers have also speculated that its FLNG technology might make more economic sense as a development option.
"Browse is a challenging project and will be expensive, but with the re-configured partnership, we see more possibility of this project moving forward," Bernstein said. "The previous partnership which contained Chevron and BHP always, was going to make development of Browse challenging. Chevron had alternatives at Wheatstone for expansion and BHP at Scarborough."
The arrival of PetroChina and MIMI had firstly, "removed both companies which were potential barriers to development of Browse," the analysts said. "Secondly, it brings in the two largest LNG-buying nations in the world. Thirdly, the price paid by PetroChina and MIMI of $5-6/barrels of oil equivalent implies to us that these companies are serious about development of this resource," they added.
"While the threat from North America expansion raises questions about the market for Browse, having two major buyers involved speaks volumes -- and suggests to us that the project is likely to move forward."
Bernstein has also taken a positive view of Woodside's recent purchase of a 30% stake in the massive Leviathan gas field off Israel. The estimated 17 Tcf of gas at Leviathan "has the potential to be a world-class project servicing both the domestic market plus LNG exports," the analysts said.
"We assume that FID [final investment decision] will be reached on a domestic gas development this year and that the Knesset will give the green light to LNG exports."
