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High costs threaten to stall LNG plant investment

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Arrow Energy’s $20 billion plan for an LNG facility on Curtis Island could be halted as its parent company Shell balks at Australia’s increasingly high development costs.

Shell has reportedly told its Arrow counterparts in Brisbane that the proposed plant was underperforming compared to other investment opportunities.

"Staff have been advised that we are still looking for more value in the project, including collaboration, in order to offer shareholders (Shell and PetroChina) a more competitive proposition," an Arrow spokesman said told The Australian.

"Arrow has previously stated that it is results and value-focused and not schedule driven."

The move comes as the International Energy Agency downgraded long-term Australian LNG export forecasts because of the high costs associated with projects under construction.

About seven million tonnes of LNG a year from the IEA's 2035 estimate was downgraded.

"The (cost) increases threaten to hold back plans for additional export projects, especially as there are large investment needs elsewhere in the mining and energy sector," the IEA said.

"Commitments to new resource developments in Australia have slowed markedly over the last year or so and the prospects of another round of major Australian LNG projects will depend heavily on how costs evolve, on the deployment of new, potentially less costly technologies such as floating LNG and on competition from other regions, notably North America."

The three plants being built on Curtis Island represent a $70 billion investment by their owners, Santos, BG Group and Origin Energy/ConocoPhillips.

While Chevron’s Gorgon LNG project on the west coast has seen a budget blowout of $9 billion, pushing development costs up to $52 billion.

Earlier this year Woodside scrapped its $45 billion planned development at James Price Point in favour of floating using a floating LNG plant.

The Arrow project was approved by the Queensland government in September.

A final investment decision was expected by the end of this year, however this is expected to be delayed.

Demand for improved cost-structures comes as Shell chief Peter Voser said soaring costs could see some projects dropped with the company looking to sell around $US15bn ($16bn) worth of projects

"We are particularly rich in upstream (oil and gas production) options," Voser told Bloomberg.

"At the moment, the pipeline we have is richer than we can do."

Shell and PetroChina have spent about $5bn buying CSG ground in Queensland's Surat and Bowen Basins through the acquisition of both Arrow Energy and Bow Energy.

Earlier this year the LNG industry warned $150 billion worth of investment in Australia could be lost if the high cost of building major projects is not fixed within eighteen months.

"While the industry, partners and governments have together delivered more than $160 billion in committed LNG investment in Australia, another $100 billion- plus in projects hangs in the balance," Chevron Australia's managing director Roy Krzywosinski said.

Floating LNG technology has previously been touted as the saviour of Australia’s LNG industry, seen by the sector as a more attractive option than onshore plants.

Shell’s $12 billion Prelude floating LNG structure is expected to start production in 2016.

BHP and ExxonMobil have been granted Federal approval for a massive floating LNG plant off the West Australian coast near Exmouth, a project worth $10 billion.

While Santos and GDF Suez are also looking into the development of a FLNG vessel for the Bonaparte Basin.

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