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Australia bears biggest brunt of Shell write-down

Published date: 03 July 2020

Australia bore the brunt of Shell’s $22bn impairment charge this week, with the write-down reflecting its expansion into unconventional gas and pioneering floating LNG (FLNG) technology with the 3.6mn t/yr Prelude venture.

Shell said it will write down the value of its Australian gas assets by between $8bn-9bn, with up to 40pc of its asset impairment from Australia.

Along with Prelude, the other Australian asset to see its value cut was Shell’s upstream coal bed-methane (CBM) gas fields that provide feedstock for the 8.5mn t/yr Queensland Curtis LNG (QCLNG), which it bought through the £47bn ($58.6bn) purchase of UK energy firm BG Group in 2015.

It also bought Australian CBM producer Arrow Energy in 2010 for A$3.5bn through a 50:50 joint venture with Chinese state-controlled energy firm PetroChina. This gave Shell the largest CBM reserves in Queensland and east Australia. The Arrow purchase was to be the launching pad for a fourth LNG plant at the Queensland port of Gladstone. But this was shelved in February 2015 before Shell bought QCLNG.

Shell said it will use the Arrow gas to provide feedstock for QCLNG. One of the reason why the Arrow gas has moved from a standalone project to providing backfill for an existing project is that earlier expectations of the proven and probable reserves of the Queensland CBM fields have been wound back, with Shell facing the largest write-down in CBM reserves over the past five years.

Shell’s gas reserves in east Australia, which are all within Queensland CBM fields, dropped by 30pc since 2016 to 7,887PJ (211bn m³), according to data from the Australian Energy Regulator this week. Shell does not publish its east Australia gas production but this reserves write-down is greater than what it has produced over the same period.

The sanctioning of Prelude FLNG offshore Western Australia (WA) in 2011 was promoted as ushering in an era of opening up gas fields, otherwise stranded because they were too far from the coast to build a pipeline to a liquefaction or processing plant.

Prelude was originally scheduled to start first shipments by late 2016 or early 2017 but shipped its first cargo in June 2019, more than 2½ years later.

But Australia’s only FLNG project has been off line since February after the country’s offshore regulator ordered Shell to carry out additional work following three safety incidents between 18 September and 9 January. Shell has yet to provide any guidance when Prelude will return to production.

Shell has become the largest producer of LNG in Australia through its interests in QCLNG, Prelude and a 25pc stake in WA’s 15.6mn t/yr Gorgon LNG, which started shipments in 2015 and is operated by Chevron. These three projects were all sanctioned during Australia’s LNG expansion boom when seven projects were sanctioned between 2009 and 2012. They added 62.3mn t/yr of nameplate capacity, of which 16.18mn t/yr is owned by Shell and representing more than a quarter of the additional capacity.

Prior to the LNG expansion boom the firm’s only Australian interest in LNG was a 16.66pc stake in WA’s 16.3mn t/yr North West Shelf LNG operated by Australian independent Woodside Petroleum.

Shell is still investing in Australia, but it has moved into electricity retailing as part of its wider group move away from hydrocarbons.


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