Could ultimately lead to thousands of wells

From Australia Financial Review

Shell has finally paved the way for a multi-billion dollar development of its large Arrow coal seam gas resource in Queensland, inking a 27-year supply deal that will unlock the biggest chunk of undeveloped gas on the east coast and should ease pressure in the tight east coast market.

Some five trillion cubic feet of gas from fields in the Surat Basin held by Arrow, a venture between Shell and PetroChina, has been sold to the QCLNG venture, which Shell owns together with a separate Chinese oil giant, CNOOC.

The contract will kick off the first large-scale development of reserves at Arrow, on which Shell and PetroChina have invested an estimated $6 billion-plus since they bought the venture in 2010.

The gas is expected to be used by QCLNG both for domestic supply and for its LNG export plant in Gladstone. It represents about 12.5 per cent of Queensland’s reserves, according to consultancy EnergyQuest.

Industrial gas users in the eastern states have been struggling to source affordable supplies as more of Queensland’s gas is exported to Asia and extraction costs rise.

The market squeeze led earlier this year to threatened curbs on LNG exports, but they were averted by a deal negotiated by the Turnbull government with producers to fill a forecast supply gap.

Queensland natural resources minister Anthony Lynham stressed the importance for industry and jobs that some of the new gas reaches domestic users.

“The government will be interested in the company’s proposals for domestic gas supply and their production timeline,” Dr Lynham said.

The project is expected to involve 800 jobs during construction and 200 ongoing operational roles once gas starts to flow in about 2020. Queensland’s total gas production is expected to increase by about 16 per cent as a result.

The initial project, likely to be sanctioned in 2018, is likely to require several hundred new wells, and potentially thousands for full development.

After officially abandoning its initial plan to build a stand-alone LNG plant in early 2015, Arrow has been under pressure to find a commercial way to develop its gas as the local market tightened. But Shell has always insisted it needed an LNG-scale market to justify the investment.

Shell Australia chair Zoe Yujnovich noted the deal allowed Arrow gas to make use of QCLNG’s existing pipelines and processing plants.

“The Arrow JV partners showed restraint earlier this decade by not building another two trains on Curtis Island, but that doesn’t change the need for scale that only LNG demand can provide,” Ms Yujnovich said.

“The path forward for Arrow that is made possible by today’s announcement would see the venture sell its gas to QCLNG upstream of existing pipelines and treatment facilities.”

Shell wouldn’t comment on commercial terms for the deal but EnergyQuest chief executive Graeme Bethune said Arrow gas is expensive, needing a price of about $8.50 a gigajoule if standalone processing infrastructure was used. But using QCLNG infrastructure reduces that price, potentially to about $6-$6.50, according to another source.

Arrow chief executive Qian Mingyang said the deal “offers long-awaited infrastructure collaboration in the natural gas industry, creating better cost efficiencies and enabling us to bring this gas to market in a challenging investment climate.”

He said development work would initially involve the expansion of Arrow’s Tipton fields near Dalby, followed by new fields starting in about 2021.

The development will bring an additional 240 petajoules a year of gas to the Queensland market, currently at about 1450/PJ a year, Mr Qian said.

Some of the Arrow gas is expected to make its way from QCLNG to the other two LNG ventures in Queensland.



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