BP moves goalposts for LNG

Alaska is a long way from Western Australia, but what’s just happened in the oil industry there could have a significant effect on plans to expand this state’s liquefied natural gas industry.

British oil giant BP, which has been a long-term shareholder in a number of big WA gas projects (developed and undeveloped), recently shocked investors with a decision to sell one of its crown jewels – the giant Prudhoe Bay oilfield in the far north of Alaska.

What BP plans to do with the $US5.6 billion from the deal is one of two interesting aspects of the Alaska exit, because much of the cash is earmarked for the expansion of shale-based oil and gas assets bought from BHP last year elsewhere in the US.

Reaction so far to BP picking up where BHP left off in the US shale fields has been muted, but it is a deal with potentially far-reaching consequences.

The most obvious is that BP is clearly signalling its belief BHP failed to extract full value from its US assets and sold too soon, missing the benefits of the latest developments in oilfield technology that is driving an oil and gas boom in low-cost onshore US oilfields.

The other aspect of BP’s exit from a giant oilfield it helped discover more than 50 years ago is that old oil and gas assets are sometimes more trouble than they’re worth, with the capital tied up better applied elsewhere.

That could be a more important signal from the Alaska sale for WA, because it’s possible a similar situation is developing with BP’s assets in WA. Among these are a 16.67 per cent interest in the 40-year-old North West Shelf and a 17.33 per cent interest in the big but undeveloped Browse gas fields, which have been earmarked as a future source of gas for the North West Shelf.

Browse is not an easy project, thanks to its remote location, which has been a factor in the failure of previous development proposals.

The latest proposal of a 900-kilometre pipeline to the North West Shelf has another obstacle to clear – the generation of large amounts of carbon dioxide contained in the gas reservoirs and from gas burned to provide the power to push the gas down the pipeline.

In theory, Browse will generate as much carbon dioxide as the Barrow Island-based Gorgon LNG project, which is struggling to comply with an emissions sequestering proposal (essentially pumping the carbon dioxide back underground).

Tensions are rising in the Browse and North West Shelf joint ventures as the partner charged with managing both projects, Woodside Petroleum, struggles to win agreement on the best way to develop Browse and integrate its gas with the North West Shelf.

Comments last month from Woodside chief executive Peter Coleman highlighted what appears to be a clash of objectives, almost certainly a result of some partners having more profitable projects among their assets waiting for approval.

According to a report in The Australian Financial Review newspaper, Mr Coleman said the point was approaching when: “People are going to have to put self-interest to the side and start looking collectively at the development of the (Browse) resource.”

BP Australia’s position in both Browse and the North West Shelf (but not the Scarborough LNG project) appears to have been aligned with that of Woodside, but the shock exit from Prudhoe Bay and a commitment to more onshore shale-based oil and gas in other parts of the US is a hint that priorities might be changing.

That was certainly the message from BP chief executive Bob Dudley after the Prudhoe Bay sale, when he said: “We are steadily reshaping BP and today we have opportunities, both in the US and around the world, that are more aligned with our long-term strategy.”

If internal squabbles and partners behaving in their own best interest was not a big enough challenge for WA LNG, there is a global glut of the fuel caused by too many new projects hitting the market at the same time.

The biggest offender in this regard is the US, where a fifth new LNG project will begin shipping this month.

Work on the Freeport LNG project near Houston in Texas started more than a decade ago, but not as an export business.

The original plan was to import LNG because the US was believed to be running short of gas.

Shale-based developments have now provided the US with at least a 100-year supply, far more than the local industry needs, so it is starting to flood the LNG market.

Rather than having limited LNG options, the world’s big oil companies now have multiple options and they will choose the most profitable and the least controversial to develop.

Of course this puts pressure on WA’s projects, which are remote and difficult as well as being exposed to environmental activism and government agencies that are not always encouraging.

Don’t forget Dongara
Losing Browse because it’s too difficult to develop, or because Woodside can’t force an alignment of shareholder interests, would be a blow to the WA economy, but perhaps not as bad as it might seem, given important changes emerging in the state’s lower-cost onshore gasfields.

Close to Dongara, WA’s original gas giant, two potentially major gas projects are taking shape, and could both become suppliers to the North West Shelf.

The operators of Beach Energy and Mitsui’s Waitsia project have been trying to talk to Woodside for some time about access to the shelf’s liquefaction facilities, with the more recent West Erregulla discovery starting to show a similar interest.

What Waitsia and West Erregulla have done is demonstrate that the region around Dongara contains much more gas than was ever thought likely, thanks to a combination of new exploration technologies and deeper drilling to access reservoirs previously out of reach.

Strike Energy and Warrego Energy surprised investors late last month with a second gas discovery in the same well, following up a commercially significant flow from the Wagina sandstone with an even bigger flow from the deeper Kingia sandstone.

Rewriting the handbook of gasfields in the Dongara region is one important event in the work of companies involved in the Waitsia and West Erregulla projects, because the knowledge being gained could lead to a big expansion of Perth Basin gas production.

What’s been discovered so far at Waitsia and West Erregulla is a fraction of the 13.9 trillion cubic feet of gas in the Browse fields, but it will be much easier gas to develop as well as being cheaper and with the potential to expand.