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Shell, PetroChina spat holds up biggest Australian coal seam gas project

By Sonali Paul and Chen Aizhu

MELBOURNE/SINGAPORE (Reuters) - Royal Dutch Shell and PetroChina are at loggerheads over gas sales pricing at their Arrow Energy joint venture, holding up development of Australia's biggest coal seam gas resource, three industry sources said.

PetroChina, the listed arm of China National Petroleum Corp (CNPC), is eager to start developing Arrow's 5 trillion cubic feet (140 billion cubic meters) of gas in the Surat Basin in Queensland to turn around loss-making Arrow Energy, one of its key overseas assets.

It is at the mercy of venture partner Shell, however, as the Anglo-Dutch oil company is also majority owner of Arrow's biggest potential customer, Queensland Curtis LNG (QCLNG), a liquefied natural gas plant on an island off Queensland state.

"PetroChina, as a 50-percent stakeholder in Arrow, expects to maximise interests from the JV versus QCLNG. But for Shell, it may be thinking of using its operator role at QCLNG to protect its interests," said a Chinese oil industry executive, who declined to be named due to the sensitivity of the issues.

PetroChina's investment is "already bleeding and the firm wants to cut losses, hoping not to make further bad investment decisions," the executive said.

Shell and PetroChina acquired the Surat gas resource in a A$3.5 billion ($2.5 billion) takeover of Arrow in 2010. They had expected to reach a final investment decision on the Surat project in 2018, with first production around 2020, after the Arrow venture signed a 27-year deal at end-2017 to supply gas from Surat to QCLNG.

PetroChina, though, is unhappy with the price in the sales agreement with QCLNG and the technical plan for developing the gas. This is now holding up final approvals, according to three industry sources familiar with the talks, who declined to be named due to the sensitivity of the matter.

Shell Australia Chairman Zoe Yujnovich said on Feb. 13 that it is working through Chinese approval processes right up to senior levels of Beijing's powerful state planner, the National Development and Reform Commission.


Shell still hopes to secure approval in time to deliver first gas in 2021, Yujnovich said.

"But it is an area we're going to have work really carefully on, particularly the Chinese approval processes, as we step through the next phase," she said.


When asked whether gas pricing was in contention, a Shell spokeswoman said that Shell supports both Arrow and QGC in developing the Surat gas project. QGC is the Shell subsidiary holding the company's stake in QCLNG.

The project would help unlock the majority of Arrow's reserves for both the domestic and export markets, the spokeswoman said.

PetroChina said in an email to Reuters that "talks on investment and cooperation in Australia's Arrow (project) are still ongoing," without responding to a question about the pricing dispute.


BIG LOSSES ON KEY INVESTMENT

PetroChina's takeover of Arrow with Shell in 2010 was its first investment in Australia's coal seam gas sector, seen as a key acquisition at the time, but it has been a big loss-maker.

Over the five years through 2017, the latest year available, PetroChina has reported losses of 15.5 billion yuan ($2.3 billion) on its share of Arrow's earnings.


Arrow Energy said in December that it had suspended engineering design work on a group of proposed expansion wells to reallocate spending to another area of the project.

It deferred all questions about timing or investment to Shell and PetroChina.

QCLNG is one of three LNG export plants built in Queensland, all fed by coal seam gas. QCLNG and one of its rivals are struggling to operate at full capacity as coal seam gas wells have proven to be less productive than expected.

This has led to concerns that QCLNG may have to shut one of its two processing units by 2025 if more gas isn't brought into production.


($1 = 1.3968 Australian dollars)

($1 = 6.7180 yuan)



(Reporting by Sonali Paul in MELBOURNE and Aizhu Chen in SINGAPORE; Editing by Tom Hogue)