Australia's largest independent oil and gas producer, Woodside Petroleum (ASX: WPL) has confirmed that it will not proceed with an onshore liquefied natural gas (LNG) plant at James Price Point, because it is not commercially viable.
Estimated to cost between $30 and $45 billion, Woodside says it is now considering other options to process the gas from its Browse fields, which are estimated to contain 1,439 million barrels of oil equivalent. Those options include a floating LNG plant, or piping the gas to existing facilities in the Pilbara region or a smaller onshore option around James Price Point.
Woodside's partner in Browse, Shell is currently developing a floating LNG plant, estimated to cost around $12 billion, to process gas from its Prelude project in the same region as Browse. It's understood that some of the partners in Browse were not keen on an onshore plant, likely due to the heavy capital expenditure required, and the reason BHP Billiton (ASX: BHP) recently sold its stake in the project. Shell has announced that it considers floating LNG to be the best way to proceed with Browse.
Floating LNG plants (FLNG) have several advantages over onshore plants, being smaller and less costly to build as well avoiding issues such as native title and land clearing approvals and have a lower environmental impact. Onshore plants require large infrastructure spends, including extensive pipelines, jetties and roads, which are fairly irrelevant for FLNG.
Shell's FLNG facility is one quarter of the size of an equivalent plant on land, but will still be 488 metres long and 74 metres wide, which when fully loaded will weigh around 600,000 tonnes, or roughly six times as much as the largest aircraft carrier. 260,000 tonnes of that is steel, five times more than was used to build the Sydney Harbour Bridge.
Rising development and labour costs have already seen several cost blowouts in Australia's LNG plants currently being constructed. Chevron's Gorgon project is estimated to cost $52 billion, while Santos Limited (ASX: STO) and Origin Energy Limited (ASX: ORG) have seen their Queensland LNG costs increase due to the high Australian dollar and high labour costs.
The Foolish bottom line
Western Australian premier Colin Barnett has repeatedly stated that Browse gas must be processed onshore, so it looks like Woodside and its partners are on a collision course with the state government. Whether they can come to an agreement that suits both Woodside and its project partners and the government remains to be seen.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in Woodside and BHP.
