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Shell, PetroChina suffer $1.4bn Arrow Energy hit

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  • Matt Chambers
  • The Australian
  • March 18, 2016 12:00AM

Screen Shot 2016-02-17 at 08.47.47Oil giants Shell and PetroChina have been forced into a further $1.4 billion writedown on their Arrow Energy coal-seam gas joint venture in Queensland after drilling in the Bowen Basin failed to deliver expected results and has delayed the project. 

The writedowns, revealed in annual accounts filed with the Australian Securities & Investments Commission, came with an indefinite delay to the Bowen Basin project and 150 job losses at the joint venture company, which was formed in 2010 to acquire the then ASX-listed Arrow for $3.5bn.

“Arrow’s net impairment is a reflection of the decrease in value due to the current challenging economic environment (including) sustained lower global oil prices and higher operating costs,” an Arrow spokeswoman said yesterday. “The impairment reflects technical challenges experienced in Arrow’s Bowen Basin upstream development that has resulted in a delay to the proposed project (which included a pipeline to Gladstone).”

The writedowns are the latest in a series of impairments across the oil and gas sector on the back of slumping oil prices. But Arrow’s writedown appears driven by poorer than expected CSG field performance in the frontier Bowen Basin, which is to the north of the Surat Basin fields where Queensland’s $70bn of coal-seam gas export plants at Gladstone are now sourcing their gas.

The indefinite delay of the Bowen Basin project, as Arrow looks for economic solutions to technical challenges, will increase concerns of a looming east coast gas shortage as another source of gas for Gladstone’s LNG projects becomes uncertain and onshore gas production becomes harder outside Queensland because of government restrictions.

As when Santos impaired its Narrabri CSG project in NSW, largely because the ground was not as productive as had been hoped when $950 million was spent buying Eastern Star Gas, Arrow’s impairments illustrate the high prices paid on untested ground in the rush to access CSG during the commodities boom.

Including $700m of writedowns last year because of lower oil prices, Arrow has now impaired its assets by $2.1bn.

In 2014, Shell and PetroChina decided against building a fourth LNG project at Gladstone because of high Australian construction prices and instead focused on shoring up gas for ­potential export through one of the existing plants.

Still, Shell’s $90bn takeover of BG Group this year, which came with the Queensland Curtis LNG project at Gladstone, increases the likelihood Arrow’s gas, when it is developed, will go through that plant.

The poor Bowen Basin results could instil doubts about the performance of undeveloped CSG ground that the three existing projects, QCLNG, the Santos-run Gladstone LNG plant and the Origin Energy/ConocoPhillips-run Australia Pacific LNG plant, will need to keep drilling for the next 20 years to feed their LNG plants.

The Bowen is a very different area to the Surat, with deeper coals that do not flow gas as easily, meaning Arrow’s project was ­always going to require something extra to get ahead.

“Horizontal wells are needed to achieve the higher production rates and the recent wells are not performing as expected at this time,” the Arrow spokeswoman said.

SOURCE

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