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Arrow Energy hits Surat project target

Co-owners Shell and PetroChina take FID, against the global trend, to cover looming Australian east coast supply shortfall and feed LNG exports

Arrow Energy has approved the first stage of the Surat natural gas project in the Australian state of Queensland, despite months of low and volatile oil prices that have seen new developments deferred worldwide until business conditions improve.

Shell and state-run PetroChina, equal partners in Arrow, reached FID on the joint venture on 17 April, paving the way for the anticipated development of 5tn ft³ (141.6bn m³) of gas over the project’s lifetime.

Shell says Surat would produce up to 90bn ft³ (2.5bn m³) /yr of coal-bed methane (CBM) that would be sold locally and exported through QGC, which operates the 8.5mn t/yr Queensland Curtis LNG (QCLNG) terminal. The Anglo-Dutch major owns a 73.75pc stake in QGC, while Chinese state-owned Cnooc and Tokyo Gas own 25pc and 1.25pc respectively.

“Given our forecast decline in production from existing QCLNG feed gas fields, I would expect much of the Surat gas project’s production to be earmarked” Levy, Rystad

The timing of Shell and PetroChina’s commitment to Surat is somewhat surprising, given the recent collapse in oil prices and months of sustained downwards pressure on LNG prices. Australian independents Woodside Petroleum and Santos, for example, deferred several major gas export projects in March.

Arrow’s FID is based on a combination of factors, however, that include the need to shore up feedstock supplies to QCLNG, a looming supply shortfall on the east coast gas market and the chance to capitalise on cheaper service contracts as other developers rein in spending.

Supply lines

Arrow will begin drilling the first of more than 600 wells this year as part of the project’s initial phase, with first gas projected in 2021.

Consultancy Wood Mackenzie stated in a note that it expected the project to deliver 255TJ/d of gas to QCLNG, providing Shell with the flexibility to divert gas to domestic buyers. This would be a major boon for the east coast market, with the Australia Energy Market Operator (AEMO) having warned at the end of March that supply shortages could emerge there as soon as 2023.

90bn ft³ Potential gas output of Surat

However, securing QCLNG’s long-term gas supplies was the primary driver behind the partners’ FID, Daniel Levy, the Sydney-based head of consultancy Rystad Energy’s Australasian upstream research, tells Petroleum Economist. It predicts that the fields feeding the LNG terminal will enter a steep decline from around 2025, with the Surat gas project being developed to arrest this falloff.

“It is unclear how much of the gas will be diverted to the local market,” says Levy. “This will depend on whether QCLNG has volumes in excess of its long-term contracts and whether the domestic price for gas exceeds LNG netback pricing. However, given our forecast decline in production from existing QCLNG feed gas fields, I would expect much of the Surat gas project’s production to be earmarked for offsetting this decline.”

Clearing hurdles

Shell and PetroChina had originally envisioned making FID on Surat in 2018, with first gas slated to flow this year. The partners reportedly could not agree on either the price of gas sold to QCLNG or the project’s development plan, however.

The former chair of Shell Australia, Zoe Yujnovich, said in February 2019 that the company was working through Chinese approval processes with senior officials from the National Development and Reform Commission (NDRC). She said while the company still hoped to deliver first gas in 2021, securing Chinese approvals was an area “we are going to have work really carefully on”. 

This year’s collapse in oil prices may have actually helped the project cross the finish line, with Shell and PetroChina now clearly aligned on Surat’s development as well as gas pricing.

Shell’s director of integrated gas and new energies, Maarten Wetselaar, said that the use of QGC’s existing upstream pipelines and treatment facilities would allow Arrow to reduce development costs significantly, making the project “competitive and economically attractive”.

Rystad’s Levy, meanwhile, noted that one of the benefits from sanctioning the project during a downturn was the potential savings to be gained from signing oilfield service contracts counter-cyclically.

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