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Shell’s Simon Henry won’t rule out write-down on Arrow LNG in Queensland

Simon Henry, CFO, Royal Dutch Shell Plc

Simon Henry, CFO, Royal Dutch Shell Plc

Article by Angela Macdonald-SmithEnergy Reporter, The Sydney Morning Herald: 1 May 2015

Royal Dutch Shell has declined to rule out a write-down of its multibillion-dollar investment in its Arrow Energy natural gas venture in Queensland, depending on decisions taken to develop the gas after the oil major’s $US92 billion ($116.62 billion) takeover of BG Group.

Chief financial officer Simon Henry told investors in London that the Arrow venture, owned equally by Shell and PetroChina, needed to think about “the best way forward to monetise” Arrow gas and create value from its position. 

It also would have to think about the impact on Arrow from the takeover of BG, but couldn’t do that until the deal was set to close, he said.

Arrow owns tracts of undeveloped coal seam gas acreage in the Surat and Bowen basins in Queensland and had been in talks to potentially supply gas to one or more of the three LNG projects being built in the state, after abandoning its plans for a stand-alone LNG project using its own resources. However, the recommended takeover of BG, announced in April, will affect the fate of Arrow gas, which is widely expected now to be used in BG’s Queensland Curtis LNG project.

“Depending how we monetise, I cannot – should not – rule out any impairment on the carrying value of Arrow,” Mr Henry said in the March-quarter results briefing in London.

“But it will depend on how we choose to develop, which in itself could over time depend on the combination with BG.”

Shell and PetroChina acquired the original ASX-listed Arrow Energy for $3.5 billion in 2010, then paid $535 million for Bow Energy. They have also been spending hundreds of millions of dollars a year at Arrow on development work.

Fresh doubt 

Shell also cast fresh doubt over the oil giant’s commitment to proceed in the short-term with Woodside Petroleum’s proposed Browse floating LNG project in Western Australia.

While Mr Henry didn’t specifically comment to investors on the project, he pointed to the possibility of final investment decisions being deferred to carry out more work on improving project economics, particularly in light of the slump in oil prices.

Shell also announced on Thursday a further $US2 billion reduction in its 2015 capital investment budget to $US33 billion or less.

Woodside chief executive Peter Coleman gave an assurance after the annual meeting in Perth in April that Shell was still committed to Browse after the BG deal. He said Browse was “still front of mind” for Shell.

Woodside is targeting a decision in mid-2015 to start engineering and design work for Browse LNG, and a final go-ahead for the project in mid-2016.

Shell also pointed to a pick-up in asset divestments as a result of the BG deal, with Mr Henry citing the transaction as “a springboard for a higher rate of portfolio change at Shell, with an increase in asset sales, a reduction in the combined capital investment, and a reduction in the number of longer-term portfolio themes”.

The Anglo-Dutch major still owns about 13 per cent of Woodside, after the failure of a selective buyback plan last year when it was voted down by shareholders.

The BG takeover deal is still going through regulatory approvals process and is not expected to be complete until early 2016. Mr Henry said he saw no particular sticking points with regulatory approvals and said Shell had “good and positive reception and messages coming out of Australia” on the transaction.

Australia is one of the few big areas of Shell’s operations with a significant overlap with BG and there is expected to be some consolidation of corporate offices should the merger be completed.

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