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High costs slow Shell’s Arrow LNG project

HIGH cost pressures faced by the oil and gas industry have been reflected in Royal Dutch Shell’s contrasting approach to two separate liquefied natural gas developments, with Shell chief executive Peter Voser signalling that progress at the company’s huge Arrow LNG project in Queensland would not be rushed.

In contrast, Mr Voser indicated the revolutionary $12 billion Prelude floating LNG project, the first of its kind, was progressing unaffected by cost pressures because most of the upfront investment was incurred in Korea.

Unlike the Arrow project, an estimated $20bn development that will include extensive onshore pipelines and a multi-billion-dollar processing plant at Gladstone, the bulk of the Prelude project costs will be tied up in the huge Korean-built ship that will host the LNG processing facilities and sit atop the Prelude field in waters off northern Australia.

Speaking at a press conference at the World Gas Conference in Kuala Lumpur yesterday, Mr Voser said the Arrow project was progressing with a clear eye on costs, which are being inflated by a wave of big LNG developments around Australia.

“Given the overall cost environment in Australia, we have said we will develop this project in a paced way, that means a slightly later development,” he said.

Shell has previously indicated it is in no rush with Arrow, given that three other LNG projects are already under construction in Gladstone.

But Mr Voser’s comments reinforce the pressures faced by those LNG developments that are either under way or planned for construction.

About $200bn worth of new LNG projects are being considered or built.

In contrast with the approach to Arrow, Mr Voser said the construction of the Prelude FLNG vessel in Korea had protected the company from the cost pressures being felt in Australia.

“We are building a floating LNG for Prelude, which is predominantly built in Korea, which gives us some kind of positive element of not being exposed to some of the high-cost environment in Australia,” he said.

Britain’s BG Group recently revealed a $US5bn ($5.1bn) blowout at its Queensland Curtis LNG project to $US20.8bn, while Woodside Petroleum’s Pluto LNG project was more than $2bn over budget.

Despite those cost increases and Shell’s own efforts to incur the bulk of the costs at Prelude in Korea, Mr Voser said he believed Australian-built LNG projects could still compete with those in other countries.

“I think Australia is competitive, but one clearly has to be taking into account that if too many projects come at the same time, that normally gives you an inflationary effect on costs. That needs to be managed,” he said.

Separately, Mr Voser played a straight bat to questions about Shell’s intentions for its remaining 23 per cent stake in Woodside.

Shell sold a 10 per cent stake in Woodside at $42.23 a share in 2010, and its remaining stake is worth about $6.6bn.

“Woodside has an interesting growth model in terms of projects,” Mr Voser said.

“Therefore I see strategic value, and we are under no urgency or pressure to do anything with that stake.”

Mr Voser said that while oil and gas prices could weaken in the second half of this year due to economic issues in Europe and a return of political stability in a number of oil-rich countries, prices would remain above historical levels for the longer term.

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