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2020-04-21 10:50:00

SHELL, AUSTRALIA GAS PROJECT $6.4 BLN

SHELL, AUSTRALIA GAS PROJECT $6.4 BLN

FTRoyal Dutch Shell will push ahead with a planned A$10bn ($6.4bn) gas project in Australia, despite the coronavirus pandemic prompting one of the worst downturns in the energy industry in decades.

The decision on Friday to approve the long-delayed first stage of the Arrow Energy development in Queensland comes on the back of tens of billions of dollars in capital expenditure cuts in the oil and gas sector.

It is Shell's first big investment decision since the coronavirus crisis and tensions between Saudi Arabia and Russia caused oil prices to crash below $30 per barrel. Natural gas prices are currently at historic lows.

Shell said in a statement that Arrow would bring up to 90bn cubic feet per year of new gas to the market at peak production. Construction will start this year with the first gas sales expected in 2021. The project is a joint venture with PetroChina.

Analysts said the decision to go ahead with the coal seam gas joint facility was surprising given the weak state of the global energy market and could be due to pressure from Australian policymakers and the fact the project could be completed over several stages.

The government has exerted tremendous pressure on producers, particularly Arrow, which is the largest undeveloped gas resource on Australia's east coast, said Saul Kavonic, an analyst at Credit Suisse.

"There has been a laser-like focus from policymakers on producers to make sure they provide enough gas for the east coast market amid previous concerns of shortages. Domestic gas prices have fallen along with liquefied natural gas prices during this crisis but they are forecast to rise again," he added.

Some of the gas from the development will be sold as LNG through the Shell-operated QGC plant in Gladstone, on the north-eastern state of Queensland's central coast. A portion will supply the domestic market, which some analysts have predicted could face shortages in the next few years.

Government legislation enacted in 2018 enables Canberra to restrict overseas LNG sales when domestic supplies run short, which has threatened the A$50bn a year export industry.

The first stage of the Arrow project will involve investment of about A$1bn. Subsequent phases will require additional board approvals, according to a person with knowledge of the development.

Graeme Bethune, chief executive of EnergyQuest, a research firm, said the QGC plant has experienced writedowns on its gas reserves, meaning the Arrow development was required to maintain production levels.

He said the threat of the government introducing a gas reservation policy — whereby part of production is reserved for domestic use — may have prompted Shell's decision to move ahead despite poor market conditions.

The company may also have been concerned the government could cancel its development licences if it did not go ahead with the project within a certain timeframe, said Mr Bethune.

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Tags: SHELL, AUSTRALIA, GAS