A few months ago, Woodside Petroleum Limited (ASX: WPL) announced that it was delaying its massive offshore Browse FLNG (Floating Liquefied Natural Gas) project in order to seek 'meaningfully lower cost outcomes', with a Final Investment Decision expected in mid-2016 instead of mid-2015 as planned initially.
While the delay was for good reason, it was also at least in part to allow the company time to evaluate the recent fall in oil prices, which could well make the hugely expensive project completely unviable.
At least one other partner in the project, Royal Dutch Shell, is reportedly reconsidering its commitment in light of low commodity prices. Fairfax media reported this morning that Browse LNG is just one of many projects whose future may be in doubt, after the oil giant recently announced massive cuts to its workforce and capital expenditure.
Shell is the largest holder in the project after Woodside with approximately 27% and its withdrawal would cast the whole project into doubt. Numbers are still being thrown around – and Woodside is seeking to lower them, as I mentioned above – but Browse FLNG looks like it might cost somewhere in the vicinity of $40 billion dollars.
This is well beyond the financial capacity of Woodside alone and, even with the partnership, will pressure the finances of each involved company.
Curiously, a decision to abandon Browse LNG would be exactly the kind of decision that a number of market participants – including Shell – felt could lead to a global shortage of oil and gas in the next five to ten years.
Commodities usually move in precisely this pattern, with high prices prompting an influx of supply – chasing profits – that leads to oversupply and prices falling. Companies then cut their costs and reduce their exploration programs because lower prices make them less rewarding.
Over time, lower exploration and drilling eventually leads to a tightening of supply which again causes prices to rise and the cycle repeats. I'm not yet confident that Woodside is a good buy at today's prices, and as such I have been investing my money in sectors other than resources.
