Increasing Dissent Among Joint Venture Partners for Choosing JPP

This week’s article in the Australian Financial Review points to the Browse LNG Joint Venture partners’ increasing preference towards piping the gas to the existing Pilbara infrastructure, in spite of major stakeholder Woodside being more intent than ever to create a greenfield site at James Price Point. Why build anew when the Pilbara’s NW Shelf gas processing facilities will be without gas to process within a relatively short period of time?

 

Browse Dilemma Rests on Shelf

by Paul Garvey, January 17, 2011


It’s either a nationally significant project with hugely positive implications for the economy, or a $35 billion white elephant that poses serious environmental and social risks.


It is the Browse liquefied natural gas project, a massive potential development earmarked for a strip of coastline north of Broome in Western Australia’s spectacular Kimberley region.


While protests from the green movement seemingly go hand in hand with any major industrial development in Australia, what makes the divided opinions over Browse so interesting is the fact that they come from the project’s owners themselves.


Project operator Woodside Petroleum, which owns a 46 per cent stake in Browse, is a vocal cheerleader for the project. For Woodside, Browse is one of the next key steps in an LNG growth portfolio that will transform the company’s earnings. More than that, it represents a new industrial hub in a region that has lagged behind many other parts of the state in development and employment.


For most of the oil and gas supermajors that make up Woodside’s minority partners in the project, however, there is a lingering concern that Woodside’s preferred development path is not the right one.


BHP Billiton has been the most vociferous, with its petroleum president, Michael Yeager, last year warning of “major technological issues”. It is these sorts of ructions that have marred Browse, which the WA and federal governments tried to stamp out in late 2009 when they issued strict rules when granting the project owners a retention lease over Browse.


The retention lease effectively mandates that the partners support Woodside’s plans to develop Browse through a dedicated LNG facility at James Price Point, requiring the partners to spend $1.25 billion on studies to put them in position for a final investment decision in 2012.


It is now more than a year since that edict, which has had mixed success. While all the project partners are following these instructions, the descriptions of the process from the various partners gives a hint of their respective sentiments towards it.


Woodside chief Don Voelte sees “active participation from all of our joint venture partners”, while BHP’s Yeager is less enthusiastic: “We . . . are being compliant with that request”.


Analysts continue to wrestle with how to value Woodside’s share in Browse amid the uncertainty. While Browse could be worth up to $10 a share for Woodside, analysts only ­factor a small portion of that into ­valuations.


The retention lease conditions should have been an end to the dissent. It does not appear to have worked out that way.


Voelte felt the need to hit out at the Browse naysayers during the company’s last investor briefing, saying he was “confused” by the criticisms voiced by some of his partners. “We love Browse, we love where it is going, and we hear things that are said about it that basically aren’t true,” he said.


“As operator, as the one talking to government, as the one talking to the traditional owners of the land, as the one talking to the Greens and the NGOs, we know exactly where we stand and we see no roadblocks.”


Voelte’s comments appeared to be, at least in part, a response to BHP’s Yeager, who earlier in 2010 flagged “a number of major technological issues on the Browse development that will be difficult to handle”.


With the resources at Browse worth tens of billions of dollars, how did the situation come to this?


The key reason for the divided views lies not with the whales that migrate past James Price Point each year, nor the rival indigenous landowner groups that dispute the proposal’s merits, but 1000 kilometres south on the Burrup peninsula.


That is the site of the North-West Shelf LNG project, the father of Australia’s LNG industry.


The five companies in Browse – Woodside, BHP, Shell, BP and Chevron – are all partners in the North-West Shelf, along with a Japanese consortium.


The five LNG trains in operation there represent Australia’s largest project and contribute about 1 per cent of the country’s gross domestic product. To replicate the project’s infrastructure today would cost an estimated $50 billion.


But the future of the project begins to get cloudy around 2020, when gas from the fields supplying the project begins to fall away.


For the dissenting partners in the Browse venture, the concern lies in seeing their existing investment in the North-West Shelf starting to starve just a handful of years after Browse is supposed to come into production. Their solution is to forget James Price Point with its tricky environmental issues and big capex requirements and instead pipe the gas south to keep the North-West Shelf at capacity for a few more decades.


Unsurprisingly, the partners most in favour of feeding Browse’s gas south are also those with the smallest stakes in the field.


Whereas the six partners in the North-West Shelf hold equal shares of 16.7 per cent, at Browse Woodside controls a 46 per cent stake, BP and Chevron hold 16.7 per cent each and BHP and Shell split the remaining 20 per cent.


Woodside’s large equity stake, combined with what is a limited development pipeline compared with its multinational partners, gives it a compelling reason to develop Browse as a standalone project rather than dilute its share by feeding the gas to the North-West Shelf.


That incentive doesn’t exist for the smaller partners BHP and Shell, both of which are more concerned about protecting their larger stakes in the North-West Shelf.


In Yeager’s critique of Browse, he cited several challenges – such as a soft sea floor, nearby reefs and special pipeline requirements – as likely to contribute to higher capital costs, but also summarised the position arguably most critical to the partners’ debate over Browse. “Our preferred option would be to never have dupli­cative infrastructure and never have the North-West Shelf infrastructure not completely loaded,” he said.


That said, the case for waiting a few more years to develop Browse ignores the fact that the gas field has already been awaiting development for nearly 40 years.


It was, in fact, discovered before the gas fields that originally supplied the North-West Shelf, making Browse a textbook example of why Australia has historically been seen as a soft touch on the “use it or lose it” policy.


So what does the future hold?


The partners are likely to deliver on the government’s prescribed work program, as for all its challenges Browse does represent a valuable resource.


At that point, the partners can approve the James Price Point option or walk away. Again, as concerned as they are, the likes of BHP probably won’t just want to give up their interests for free.


More likely than not, the obstinate partners are banking on some delays occurring that push back the project’s development. The smaller the gap between Browse’s first production and the start of gas shortages at North-West Shelf, the stronger the case for piping the gas south.


There seems plenty of potential for delays, given the environmental concerns flagged from some quarters and the WA government’s contentious plans to compulsorily acquire the James Price Point from indigenous landowners. Those moves, which sit very uneasily with the project partners, could drag through the courts for a long time.


Citigroup analyst Mark Greenwood says he is not convinced by the James Price Point option, and warns that the assessment schedule dictated by the government is “highly aggressive”. “Projects of this size and complexity typically require more time than provided by the government to reach a level of definition required in order to make a final investment decision,” he says.


“When projects are driven by a schedule rather than follow good project-management practices, these projects can end up being failures through cost overruns, schedule slip, or operability problems.”


The LNG business is not easy. That’s why the cost of projects is measured in the billions of dollars, and why the sector is typically dominated by multinational energy giants.


By the standards of what is a particularly challenging industry, Browse seems an exceptionally challenging project.