"Sunrise dawns on national interest"

by Stephen Bartholomeusz 6 April 02 Sydney Morning Herald Business Section

The Northern Territory Government could be pushing a gas project which is no longer viable.

Northern Territory Chief Minister Claire Martin this week sought Federal Government intervention, and potentially massive financial assistance, to convince or coerce the Greater Sunrise gas project partners to change their plans. In the process Ms Martin turned around the national-interest argument used by Woodside to stave off last year's bid by Shell against the group, arguing that its support for Shell's proposals for developing the

Timor Sea fields was hypocritical.

At the heart of the confrontation between the Sunrise partners and the NT Government is the issue of whether development of natural resource projects should be driven by pursuit of the highest commercial returns or whether there is some larger obligation to the community. The seeds for the controversy over Sunrise were sown during the Shell bid. In the midst of the battle, Woodside entered a "co-operative agreement" with Shell's LNG rival, Phillips Petroleum, to jointly develop Sunrise and Phillip's Bayu Undan project, also in the Timor Sea.

The plan, which was seen as immensely provocative towards Shell, envisaged gas being piped from both projects to an onshore LNG plant in Darwin. The gas would have been both for export and available for domestic consumption. The NT Government saw the proposal and its domestic gas element as a catalyst for massive industrial development. Ms Martin said an onshore gas plant in Darwin could add $15 billion to Australia's GDP over the life of the project.

Unfortunately, Woodside (33.4 per cent), Shell (26.6 per cent) and Osaka Gas (10 per cent) no longer support the original plan. Phillips (30 per cent) has yet to make its position clear. The change in plans was triggered last year when Shell ambushed Woodside by proposing a radical, untried approach to development of the fields a $5 billion floating LNG processing plant. Initially, Woodside was strongly opposed to the concept. The relationship with Shell was still fractured and it viewed the plan, which threatened the basis of the deal with Phillips, as an attempt to undermine that agreement.

Its views have changed as the understanding of the floating plant's economics has deepened and the risks of the project have been reduced by Shell's offer to underwrite the technological risk and about $20 billion

of future LNG sales. Also, Phillips has found Japanese customers for Bayu Undan. It will process gas onshore but won't have the capacity to supply domestic markets. The economics of the floating plant relative to the original onshore development are compelling. The floating plant has an estimated capital cost of about $5 billion. The cost of an onshore project is estimated at

more than $7 billion.

While the NT Government commissioned a study that produced different numbers it estimates the cost of an offshore plant at $7 billion and an onshore plant at $6.3 billion, Woodside's conversion from opponent to supporter of the floating plant lends credibility to the view that the approach has a fundamental cost advantage.

The other factor which altered Woodside's views was a marketing exercise with Shell that failed to attract a potential domestic customer base capable of underwriting an onshore project. Sunrise doesn't have the reserves to satisfy both LNG export demand and domestic customers that was the driver for the deal with Phillips.

Thus, it could be argued, the NT is pushing a project that cannot now exist. Either the Sunrise partners go ahead with a floating plant or they build a far more expensive onshore LNG plant or they build nothing at all. There isn't a domestic gas aspect to any of the options. If all other things were equal, it would be preferable that the multiplier effects from exploiting Australian resources were maximised. It would be preferable that Sunrise gas could be leveraged into greater industrial development.

Two billion dollars, whether paid for by the shareholders in the companies involved or, in the very unlikely event that the Federal Government was prepared to accede to the NT requests, by taxpayer funds,

would be a massive subsidy. For it to be effective, and to create industrial activity based on cheap gas, the subsidy might need to be even greater and ongoing. The aluminium smelters, petrochemical complexes and other industries the NT Government envisages all require large but cheap supplies of energy.

The "value add" argument might be stronger if Sunrise were the only source, or best source, of gas for the NT. It isn't. There is a lot of gas in the Bonaparte Basin off northern Australia which is more likely to be commercialised early and brought onshore in the absence of competition for domestic customers from Sunrise and Bayu Undan. More generally, there are sufficient gas reserves already identified and vast prospective areas barely explored on and off the shores of Australia that would already be sufficient to meet domestic demand for the best part of the next century.

If Shell's floating-plant technology is as effective and efficient as it claims, by itself the Sunrise project would help increase reserves (the technology would be transferable to other offshore reserves) and bring forward commercialisation of other Timor Sea gas reserves currently considered too small to be exploited as stand-alone projects.

The national interest in this case isn't in forcing or subsidising a particular project to do something other than whatever delivers the highest possible returns on investment and the highest possible profits and royalties for the Australian participants. More particularly, it isn't hypocritical of Woodside to support the course that it believes offers the highest returns and lowest risks to its shareholders. It would be hypocritical of it to do anything else. The national interest in preventing Shell from acquiring Woodside lay in maintaining not just a level of Australian ownership and control in the key participant in the North West Shelf project, but a participant in the project whose interests were aligned with the national interest of promoting the development and sale of Australian gas into export markets.

Woodside's role in the Sunrise project, and in the Shelf, provides reassurance that the project isn't simply a pawn in the global LNG battle being waged by the likes of Shell, BP, Exxon and Phillips. While Woodside's interests are narrower than any concept of the national interest, its support for the floating-plant option provides reassurance the proposal will optimise development of the resource. And that ought to be the starting point for an assessment of the national interest in any $5 billion project.

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