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Floating LNG hopes are deflated by Browse, Abadi decisions

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Angela Macdonald-Smith: 28 March 2016

Questions are being asked about whether floating LNG technology will live up to its hype after last week’s decision by Woodside Petroleum’s Browse gas venture to freeze work was followed by the axing of a floating design for the Abadi gas field in Indonesia.

The decisions are seen as major setbacks for the innovative technology that was expected to revolutionise the industry by allowing remote offshore gas fields to be developed more cheaply and with less environmental impact.

While Woodside still wants to use floating LNG to develop the three Browse gas fields off the far north-west coast, the venture has dropped a deal to use Shell’s floating LNG technology from the oil giant’s large Prelude project, also in the Browse Basin. The project was to involve three huge FLNG vessels anchored at the Browse fields exporting LNG directly to Asia.

At Abadi, a venture led by Japan’s Inpex Corporation that also involves Shell, Indonesian president Joko Widodo declared last week the project should be built onshore, reportedly to maximise employment and other benefits.

With the Bonaparte gas venture also dropping its plans for a floating LNG plant off the north coast in 2014 and ExxonMobil deferring its Scarborough project in Western Australia, Shell’s $US12 billion ($16 billion) Prelude venture looks likely to be the only FLNG project around Australia for several years.

That’s in stark contrast to expectations a few years ago for several to be running by the end of the decade as the industry turned to floating plants to counter spiralling costs of onshore construction.

“It’s certainly very disappointing,” said Tony Regan, an LNG consultant at Tri-Zen International in Singapore. “It’s unfortunate because Browse and Abadi would have been units that were Prelude clones – so is it suggesting Shell went in too ambitiously? Too big and expensive, and over-engineered?”

Gas’ ‘killer app’

Floating LNG was supposed to be “the killer app” that enabled stranded gas fields to compete even amid lower oil prices and against US exports, Bernstein Research analyst Neil Beveridge said.

“The decision not to move forward with FLNG suggests the costs are not yet low enough and efficiencies not yet high enough to compete with conventional LNG developments other than in niche settings,” Mr Beveridge said, predicting the Browse decision would slow enthusiasm for the process. 

Shell, a member of the Browse venture, declined to comment last week on the dropping of the floating LNG plan.

Woodside chief executive Peter Coleman said design work for Browse had shown development costs would be about 35 per cent lower “on an apples for apples basis” than the earlier plan for an onshore plant at James Price Point.

“[But] the project requires pricing to be greater than where it is today and it requires us to fund it during a period of time where we’re not sure prices will recover to our long-term view,” he said.

Mr Coleman said rapid advances in FLNG technology meant the venture needed to consider other options apart from the Prelude technology as it sought to move the project into the “first quartile” on a global cost basis from the second quartile.

“Let’s not avoid the fact that technology improves and it has improved,” he said.

Long-term contract issues

Tri-Zen’s Mr Regan and other analysts noted that development cost was just one side of the equation that meant Browse didn’t stack up, with the other major problem being that LNG buyers were refusing to sign up to long-term purchase contracts at high enough prices to underpin $US40 billion or more of investment.

UBS analyst Nik Burns said that locking customers into LNG contracts priced at over $US10 per million British thermal units, as required by Browse, would need a recovery in oil prices to levels only expected in 2018 at the earliest.

Mr Regan noted that other FLNG projects were proceeding, with ENI recently confirming it hopes to reach a final investment decision this year on a floating LNG project at its Coral venture in Mozambique. Golar LNG is meanwhile actively developing at least two FLNG projects in west Africa, one for Ophir Energy and one for Anglo-French company Perenco.

“The principle is still sound: FLNG still has many attractions, it is still cheaper,” he said. “It’s just that even at a lower price it couldn’t get over the line at Browse.”

Read more: http://www.smh.com.au/business/energy/floating-lng-hopes-are-deflated-by-browse-abadi-decisions-20160328-gns3pc.html#ixzz44ByZRnBD

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Where does the cancellation of Browse and Masela leave Prelude?

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