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Woodside Petroleum drops $40 billion Browse floating LNG project

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Screen Shot 2016-03-15 at 10.34.57Shell, Woodside’s biggest partner in the project, had also spoken cautiously on its prospects…

Angela Macdonald-SmithEnergy Reporter: 23 March 2016

Woodside Petroleum chief executive Peter Coleman is turning a keener eye to potential acquisitions after a decision by the Browse joint venture to ditch a $40 billion-plus floating LNG project freed up the company to chase “attractive” assets.

The indefinite deferral of the Browse project off the north-west coast was forced by the collapse in oil prices, which created an “extremely challenging external environment” for the huge project despite work done to reduce costs, Woodside said.

Mr Coleman said the decision to delay the venture gave Woodside headroom to pursue acquisitions of assets that were starting to come onto the depressed market, and signalled they would take priority over returning capital to shareholders.

A share buy back “is attractive in some respects but it’s also maybe . . . preventing you from pursuing opportunities that only come up once every 10 years or so in the cycle,” he said.

The deferral of Browse makes the venture the biggest local casualty from the rout in oil prices that had by January caused the cancellation or deferral of $US380 billion of projects, according to Wood Mackenzie.

It is another blow to the Western Australian resources sector, already struggling with a slump in investment after the end of the commodities boom.

Federal Resources Minister Josh Frydenberg labelled the decision as “unfortunate” but noted that Woodside remains committed to the project.

WA Premier Colin Barnett said he was disappointed rather than surprised.

“It would have been very difficult for them to commit probably north of $50 billion to develop this project when the price of petroleum including natural gas is low,” Mr Barnett said, voicing hope the project could “get its opportunity” when prices recover in two to three years.

‘New market reality’

The decision “means that Browse [gas] will remain in the ground for another decade,” said Bernstein Research analyst Neil Beveridge, who added that it “reflects the new market reality”.

But Mr Coleman foreshadowed that new major petroleum supply projects like Browse would need to start moving within 2-3 years to meet demand down the track.

“That’s not so far out in time, but it’s not weeks and months,” he said in an interview.

The Browse partners had already deferred the venture several times, most notably in April 2013 when they abandoned plans for a huge new onshore plant at James Price Point at a cost of $80 billion or more. They have spent billions on trying to commercialise gas in the Browse Basin which was first discovered in the early 1970s.

Mr Coleman had foreshadowed the bad news on Browse last month when he noted a lack of appetite among Asian LNG customers for new long-term contracts, and said the positive impact of cost reductions at Browse had been wiped out by the continuing drop in oil prices.

Shell, Woodside’s biggest partner in the project, had also spoken cautiously on its prospects, with chief executive Ben van Beurden saying in February that the project would need to be economic at an oil price of less than $US50 a barrel.

Woodside said floating LNG remained its preferred solution to develop Browse gas, but the venture has scrapped a deal to use Shell’s FLNG technology that will be used at the oil giant’s Prelude project. It will instead examine other more recently developed FLNG processes that could be more competitive.

Mr Coleman also wouldn’t rule out the venture ultimately deciding on a totally different development option, such as piping gas down to Karratha to use in the North West Shelf LNG venture.

Plans for future work to develop Browse gas need to be clarified to the WA government within 120 days, under the terms of the venture’s retention lease.

The decision leaves Woodside without any major new growth projects, after its failed $11.6 billion takeover tilt for Oil Search late last year and its earlier decision to walked away from the Leviathan gas project in Israel.

“For Woodside the decision makes overseas M&A more likely given the absence of organic growth options in their portfolio and in Australia,” Bernstein’s Mr Beveridge said.


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