With Chevron’s equity in the North West Shelf (NWS) Joint Venture up for sale Molyneux Advisors TG Tan and Simon Molyneux take a look at the opportunity and what potential buyers should focus on.
What is the NWS worth?
With Chevron placing its stake on the market, this question is timely, interesting, and difficult. Difficult because of the many moving parts involved. Let’s take a look at some of them.
How much NWS gas is left?
Not much. The NWS LNG plant needs about a TCF of gas a year to keep it full. So only the most significant fields will extend its production plateau for long. Woodside acquired the Fortuna seismic survey in 2014 using the latest technology to see if there was anything left to find. This has not turned up anything of significance.
The production cliff is approaching fast. Recent projects such as Persephone and Greater Western Flank 2 have helped but does not change the fact that ullage will increase quickly from the early 2020s.
That ullage will be filled by tolled gas, won’t it?
That’s the idea, with the >10 TCF from Browse the main game. But even before COVID-19 Browse was challenged. It’s expensive, and where will Woodside put all that CO2?
Another challenge is the gas tolling agreement. The price has been agreed, but landing the other key terms has not been easy with joint venture partners having misaligned stakes in NWS and Browse. Chevron’s exit may reduce the misalignment, but only if one of the existing participants takes up this stake.
Woodside’s schedule for Browse, pre-COVID, was ready-for-start-up (RFSU) 2026/27. Final Investment Decision (FID) has now been deferred. There would have been ullage at the NWS plant even on the previous project timing. This period of reduced production will now be longer.
This gap could be filled by Chevron’s Clio Acme fields, via the Pluto-NWS interconnector pipeline. There has been little public comment on this opportunity since its announcement in 2018. Chevron’s exit from NWS must now cast doubt on NWS backfill as a development option for Clio Acme.
How much longer can the NWS hardware last?
The North Rankin platform dates from 1984, and the LNG plant delivered its first cargo in 1989. The infrastructure is old, and keeping it running requires a large maintenance effort. More than that, particularly at the Karratha plant, life extension is needed. Corrosion, especially under insulation, and obsolescence are a couple of the issues that need to be addressed.
The cost associated with this is highly uncertain. The extent of corrosion under insulation is notoriously hard to determine before you actually remove the insulation. And when repairing, do you design for 5 years extra life or 15, i.e. Browse or not?
And when parts of the infrastructure are no longer needed, how much will it cost to remove and abandon? Extensive abandonment has not yet been done in Australia and aside from the technical challenges, the rules on how it must be done (complete removal?) and disposal have not yet been tested.
All this adds up to NWS project participants who must increasingly be motivated to make the third-party tolling arrangements work. The virtuous cycle consists of getting paid for use of capacity that would otherwise be idle, and deferring abandonment.
This imminent production cliff-edge has been clear to the NWS project participants for the last decade. That the forward plan is not yet clear shows how difficult it has been to make all these moving parts fit.
Woodside is seen as the obvious buyer for Chevron’s stake in NWS. Woodside holds a strong position as operator, holder of pre-emption rights and highly motivated to bring forward their Browse project to backfill NWS. Nevertheless Woodside has limited resources, a valuable discrete opportunity exists for other parties who want an infrastructure position, exposure to mature upstream LNG or seek to accelerate their own stranded resources.