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Arrow Energy CEO Says Queensland LNG Invest Decision Due 2013

By Ross Kelly Published October 18, 2012 Dow Jones Newswires

MORANBAH, Australia–Royal Dutch Shell PLC (RDSB) and PetroChina Co. (PTR) are on course to approve construction of a multibillion dollar gas-export project in eastern Australia next year, shrugging off fears that cost pressures or a supply glut will delay the venture.

“Momentum on the LNG project is really very strong,” said Andrew Faulkner, chief executive of Arrow Energy, which Shell and PetroChina acquired in a 3.4 billion Australian dollar (US$3.53 billion) transaction in 2010.

Arrow Energy’s plans involve the initial construction of two processing units at Gladstone in Queensland state capable of producing a combined 8 million metric tons of liquefied natural gas, or LNG, annually for export. Annual capacity could be increased to 18 million tons of LNG in future by adding two further trains.

The project is one of four large developments proposed or under construction at Gladstone that are set to transform rural Queensland into one of the world’s cornerstone suppliers of LNG, a natural gas chilled to a liquid form so it can be transported by sea.

BG Group PLC (BG.LN) and a consortium led by Santos Ltd. (STO.AU) have started construction of separate gas-export projects at Gladstone. Origin Energy Ltd. (ORG.AU) and ConocoPhillips (COP) are also building the Australia Pacific LNG project, and have a Chinese partner after selling a 25% stake in the venture to China Petrochemical Corp., better known as Sinopec.

Mr. Faulkner said Shell and PetroChina are set to make a final investment decision on whether to begin construction of the Arrow Energy facility, which will use natural gas trapped in coal seams and convert it to LNG, “in the back end of next year”.

Technology for liquefying coal seam gas for export is untested on a large scale, while developers also need to overcome issues presented by coal seam gas’s lower heat content relative to conventional natural-gas supply. Developers of LNG facilities are also grappling with rising costs, as they must compete for labor and equipment with peers like Chevron Corp. (XOM) or Japan’s Inpex Corp. (1605.TO), which are building new plants in Australia fed by natural gas from conventional fields.

However, Mr. Faulkner said PetroChina’s LNG import needs and Shell’s global network for LNG trading means Arrow Energy isn’t under pressure to find customers for gas from the project.

Starting construction later than rival LNG projects could enable the venture to miss peak demand for labor and equipment in Queensland, resulting in lower development costs, he said.

Arrow Energy has already spent A$1 billion a year on the project, and “our budget next year is larger than that,” Mr. Faulkner said. That means about A$3 billion will have been spent on the project prior to a final investment decision, on top of what Shell and PetroChina paid on acquiring gas reserves through its takeover of Arrow and later purchase of Bow Energy Ltd. for A$535 million.

“Clearly they have high expectations that it’s the right way to spend their money,” Mr. Faulkner said, referring to Shell and PetroChina.

The Arrow Energy venture had about 8,000 petajoules of proven and probable coal seam gas reserves at the end of 2011 and will need reach around 13,000 petajoules to support the foundation stage of the project.

Mr Faulkner said it isn’t certain yet that there is enough gas to expand the project, although exploration work is continuing in Queensland state and there’s “upside potential” to find more reserves at its tenements to support a third or fourth processing unit.

-Write to Ross Kelly at [email protected]

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