Go-ahead for Prelude LNG

Shell has announced the go-ahead for the Prelude LNG project, the world’s first floating LNG project, to be developed some 200 km offshore northern Australia in the Browse Basin. The project will tap around 3 trillion cubic feet of gas in the Prelude field, which was discovered in 2007, and begin production in around 2016. It will produce 3.6 million tonnes per annum (mtpa) of LNG, 1.3 mtpa of condensate and 0.4 mtpa of LPG. The project is also likely to tap the Concerto field and the Crux field. The LNG will most likely go to Osaka Gas (0.8 mtpa) and CPC (2.0 mtpa), as well as into Shell’s global portfolio.

Floating LNG has been proposed for years but this is the first project approved. In principle floating LNG should have a number of advantages, avoiding the cost of pipelines to shore and being able to tap a number of fields during the life of a facility.

However the cost of this first floating project appears to be higher than cost benchmarks for conventional projects. The Weekend Australian quotes Shell as saying the project will cost US$3.0-3.5 billion per million tonnes of capacity, making a total cost of US$10.8-12.6 billion. Presumably Shell is expecting unit costs to fall as more facilities are built. Shell believes it has a number of opportunities around the world for floating LNG. Successful implementation of floating LNG will boost global LNG supply.

This decision also shows Shell’s focus on LNG and desire to operate its own projects. While historically aligned with, and a major shareholder in, Woodside in Australia, Shell has also recently added an interest in the Wheatstone LNG project operated by Chevron (NYSE:CVX) (with which it is also a partner in Gorgon) and it also has a 50% interest in the Arrow LNG coal seam gas project in Queensland with PetroChina (NYSE:PTR).

There has been a concern that while there were many potential LNG projects, not many were reaching FID. This has now changed. Between Australia and PNG five projects have now reached FID in less than two years.

The Prelude decision brings the number of Australian LNG projects under development to five: Pluto, Gorgon, QCLNG, GLNG and Prelude. The total capacity of these projects is 39.2 million tonnes and when completed will bring total Australian capacity to around 59 million tonnes.