Give customers choices, says Shell chief Tony Nunan
At the start of 2020, Tony Nunan took on the job of running Shell in Australia.
“I must admit on the first of January when I thought forward to how this year might play out, it has been nothing like that,” he says.
Nunan has been dealt a rather different set of cards to his predecessor. Zoe Yujnovich sailed on to Shell HQ in The Hague with oil prices robust, its LNG export terminal QCLNG joint venture at Curtis Island hitting its 500th export cargo, the blue sky of the giant Browse gas field for the North West Shelf and the excitement around Shell’s pioneering floating LNG project Prelude coming into its own.
This year COVID crushed oil prices and the blue sky in the northwest disappeared. In July Shell announced about $11bn in writedowns, the bulk of them on Australian assets.
The new country chair, as Shell calls the post, is just that: a boy from Toowoomba in Queensland who has a keen grip on the now highly politicised east coast gas debate.
“I do take the role we play in the east coast market as a very important one. We always want to make sure that our customers are well supplied, have choice and we’ve been really transparent in the way that we’ve done that.”
Nunan supports the regulator’s ongoing gas review of the east coast market because it brings transparency. But the east coast is unfinished business: manufacturers have been squealing about high prices of long-term contracts and uncertain supply of gas and often blaming the huge LNG export deals in place.
Last week the government, advised by former Dow chief Andrew Liveris, launched its gas-fired recovery to fuel jobs in manufacturing. The response from the gas sector has been a polite welcome.
In contrast, manufacturers have been left wondering how the package will bring lower prices and address the gap between spot prices and term contract prices.
Nunan argues that the answer is to give customers more choice. He points to the government’s new gas trading hub idea, based on the US Henry Hub that delivers a deep, liquid market. “Historically, we’ve had a market where there has been a predominance of term contracts that had been put in place. Customers have asked for access to international spot pricing and what the Prime Minister announced is creating a hub concept that will seek to do that.
“It will take time and given the difference in scale between the US in Australia, it won’t get to the point of having the same depth as a Henry Hub, but we do believe it is a concept that is important.
“That will then give choice to customers and those that are really keen to get access to those international spot prices will be capable of doing that through traded hubs. Likewise, some customers who continue to prefer term contracts will then have a mechanism to be able to negotiate those.”
It’s hard to gauge the success of the proposed Wallumbilla hub, but there are parts of the government’s gas-fired recovery plan that are less comfortable for Big Gas. Take the threat of a mandatory code of conduct if the sector does not agree on an acceptable voluntary code by next February.
Here Nunan is equally polite, saying he will work with the government to seek to understand what is desired. He also wants any code of conduct to include buyers, whose procurement behaviour has sometimes been in question.
“It will be important that it applies to the entire market, and anything that covers both the seller side as well as the buyer side and helps bring both transparency and competition to a market we see as a good thing.”
While others in the sector such as Kevin Gallagher at Santos have also welcomed hubs, there is clearly quite a dance going on between Big Gas and the government, which extends to the government’s plan to unlock five gas basins. They include North Bowen in Queensland, home to Shell’s Arrow joint venture.
The Arrow website states that “the full scope and timing of the proposed Bowen Gas Project are not known”.
“The Arrow business is an important one to us” says Nunan. “We really see the need to continue to expand supply and we want to play our part in that as we did earlier this year with the announcement of Arrow’s development within the Surat Basin.”
Next year Shell’s Surat gas from south Queensland will begin supplying locally and for export through Curtis Island. The approach to capital spending is far more disciplined than years gone by. Does a new pipeline from the North Bowen Basin have merit on economic grounds? Nunan will only say that it is an important part of the equation and that Shell supports the government’s desire to explore multiple options for infrastructure. More dancing to do there, clearly.
Nunan’s big operational challenge is Prelude, the largest floating LNG platform in the world, which has suffered major delays, and he will not be drawn on whether the project will produce any LNG this year.
“We are going through our hydrocarbon restart process. That’s a process that we will take step by step because we want to do it right. It will take as long as it needs to take so that we get it right.”
In the meantime, rival gas producer Ichthys, operated by the Japanese Inpex, sits next door to Prelude and has been producing gas for a couple of years. Given that the basin is connected, some analysts believe Ichthys may have sucked out gas from Shell’s part of the reservoir.
“It is a unique basin,” Nunan says. “And we always focus on what is within our business, Prelude being an important part of that. What we are focused on is making sure that we do things right and that we set it up for the long-term success.”
Tony Nunan is running one of Shell’s most important operations at one of the most difficult times in the group’s history. In late April, Shell announced it would cut its dividend for the first time since World War II.
“I don’t want to survive this pandemic with a company that is no longer capable of anything,” global CEO Ben van Beurden said at the time.
In July, the majority of the $11bn in writedowns, including Prelude, were in Australia and Shell is now undertaking a global restructuring.
But Nunan insists that Prelude and the North West Shelf, where Shell has been involved since the 1970s, remain core assets in the Shell portfolio.
“There have been impairments this year and that is a reflection of the change in the market — what’s happened with COVID and significant reduction in demand and short-term uncertainty as a result of price. And so as that price flows back into our assets, we reassess them and hence the reason for the impairments.
“Each of our assets we review on an as-needs basis to understand how we can continue to extract value from them.”
As a country chair vying for the Shell group investment dollar, the best news for Nunan is that the government is choosing gas as the transition fuel to a renewable energy future and to fire the recovery.
Shell is now looking at Australia as the testing ground for its emerging energy portfolio which includes battery provider Sonnen and ERM, which supplies electricity to industrial and business customers, and a major solar project, Gangarri Solar, under way near Wandoan in Queensland.
“What you can see happening here in Australia is we are putting together the building blocks that will create the energy system that we want to see in the future,” Nunan says.
