Gas export boom loser may win from Australia supply crunch

SYDNEY (Bloomberg) -- Missing out on Australia’s natural gas export boom may be the best thing that happened to Arrow Energy Ltd.

The decision by the Royal Dutch Shell Plc and PetroChina Co. JV to scrap a A$20-billion project to ship Arrow’s fuel overseas as liquefied natural gas looks like a blessing in disguise. The Brisbane-based producer now plans to boost output, allowing it to take advantage of Australian prices pressured higher by tighter supply at home. Meanwhile, rivals that opted to export are grappling with cost overruns, low international prices and mounting criticism as the country faces a looming gas shortage.

“They’re probably thanking their lucky stars they didn’t go ahead with Arrow LNG,” said Graeme Bethune, CEO of EnergyQuest, an Adelaide-based research company.

Australia’s race to become the world’s biggest seller of LNG -- gas supercooled into liquid and shipped overseas on tankers -- has put it on course for a supply crunch at home amid lower-than-expected domestic production and drilling bans in several states. Solving the budding crisis has become a top priority for Prime Minister Malcolm Turnbull, whose government last month said it would restrict exports from the eastern state of Queensland unless producers ensure adequate supplies for the domestic market.

Arrow, owner of the largest uncontracted gas reserves in eastern Australia and supplier of about 20% of Queensland’s gas, has begun engineering and design work on an expansion of its Tipton project in the state’s Surat basin that will more than double output, the company announced last week. The gas, which is extracted from coal beds, will be for both domestic consumption and available for use in export projects, it said.

“We now have a vision to become a very cost-competitive upstream coal-seam gas business in Queensland,” Ivan Tan, Arrow’s chief operating officer, said in an interview. While Tan didn’t comment on whether the company was better off having not built an LNG project, which was scrapped in 2015, he said Arrow has benefited from the lessons learned by the three other Queensland exporters and is focused on cost efficiency.

'Best light'

Arrow’s Tan declined to comment on whether it had discussed its expansion plans with the government, but said the company was committed to the domestic market. Shell directed inquiries to Arrow. PetroChina didn’t respond to requests for comment.

“We need to put Arrow in the best light with the government,” Tan said. Arrow expects to release plans later this year about how it will bring to market the bulk of its reserves in the state’s southwest, he said.

The decision to build three separate east coast export projects, including Shell’s Queensland Curtis LNG, rather than collaborate resulted in $10 billion of unnecessary spending, according to consultant RISC Operations Pty. The next two Australian developments -- Chevron Corp.’s Wheatstone LNG and Inpex Corp.’s Ichthys LNG -- may overrun their combined $63 billion budgets by more than $8 billion. Woodside Petroleum Ltd.

Some Australian projects “lost sight” of the need to be vigilant with their decisions around capital spending, Woodside Petroleum Ltd. CEO  Peter Coleman said in a speech Monday at an Australia oil and gas conference in Perth.

“The capital-intensive nature of those LNG plants has put pressure on those companies that have built them,” said David Lennox, a resources analyst at Fat Prophets in Sydney.

While Arrow holds “one of the best undeveloped gas sources for the east coast,” only part of it may be immediately viable for development, said  Saul Kavonic, an analyst at Wood Mackenzie Ltd. “A lot of the Arrow resource is still relatively costly and needs infrastructure,” he said, adding that he expects some of it to go to the Queensland Curtis plant, which was seen as the outlet for Arrow’s gas after Shell’s 2015 takeover of BG Group Plc.

Arrow could cash in on buoyant domestic prices by keeping supplies at home. Spot LNG in Asia has fallen by about two-thirds since early 2014, according to World Gas Intelligence. Meanwhile, Australian wholesale prices have tripled in the last two years, a February report from the Australian Industry Group found.

“The gap between domestic and LNG prices has narrowed,” said Fat Prophet’s Lennox. “Arrow has done themselves no harm by staying out of the export market when they did.”