Shell, Woodside cast doubt on LNG’s future investment

Shell says LNG growth will no longer be a priority, potentially ruling out more large-scale Australian investments.

Woodside Petroleum chief executive Peter Coleman delivers his wake-up call to the industry.

Shell says LNG growth will no longer be a priority, potentially ruling out more large-scale Australian investments as it adds non-fossil fuels to its growth focus and as questions grow over global LNG demand.

The change in focus for Shell came as Woodside Petroleum chief Peter Coleman issued a wake-up call to the industry’s ­annual gathering, saying LNG demand growth was not guaranteed and Australia’s energy sector was being left behind by the US, a growing LNG competitor, when it came to cost-cutting and surviving low prices.

In a frank assessment of industry attitudes at the Australian Petroleum Production and Exploration Association in Brisbane, the Woodside chief said the industry was blaming its problems on others and assuming the role of gas in the global energy mix was assured.

“There is a view that says if we wait, we don’t have to do anything because the demand of the developing world will grow ... and if we turn off coal power stations, gas demand will go up, and next year’s conference will be a rosy one,” Mr Coleman said in a presentation to the conference.

“Well, nothing could be further from the truth. Simply surviving is not an option ... we must change to grasp the opportunity in front of us.”

Mr Coleman’s comments came ahead of an announcement from his major shareholder and Browse LNG partner, Shell, that it would no longer focus on LNG growth.

Shell, the nation’s biggest LNG producer, said that despite expecting “robust” gas demand for decades, it would focus growth ambitions on deepwater oil and chemicals, and longer term, shale and “new energies”, including biofuels, hydrogen power, solar and wind.

“Integrated gas (LNG and gas to liquids), which was previously a growth priority for Shell, has reached critical mass following the BG acquisition and planned growth in liquefied natural gas (LNG), particularly in Australia,” Shell said as it announced a change to its growth focus in a carbon-constrained world.

“The pace of new investment will slow here, and integrated gas will now prioritise the generation of free cash flow and returns.”

The statement appears to rule out potential future investment in the Browse LNG project, expansion of Shell’s Queensland Curtis LNG plant using the Arrow coal seam gas project it owns in a 50-50 joint venture with PetroChina and a fourth train at the Chevron-operated Gorgon project.

Shell chief Ben van Beurden said investment in LNG would not stop completely but that part of the business now made up one-third of its capital employed and the focus would be on cash generation.

Mr van Beurden said capital spending would be capped at $US30 billion ($40bn) a year and cost-cutting would continue.

Mr Coleman said recent travels to North America had underlined how quickly the US industry had adapted to falling prices.

“It is very evident that a lot of our competitors, particularly in North America, are doing or have done the things they need to do to get their cost structures right — they have a lot more flexibility to do that, but they are doing it,” he said.

“I came away thinking I’m glad Woodside was ahead of the curve (in cutting costs), but the pack is catching up quickly, so we are going to have to run even faster.”

But he said the Australian industry was in danger of falling behind and had not taken cost-cutting seriously enough.

“We need to fundamentally think about what we do and the way we do it. I just don’t get a sense yet we’re quite there,” Mr Coleman said. He said presentations at the conference had given him the impression the industry was not looking at self-help but more that gas was a clean product that should get into the market, which was growing and that it was great that oil prices were back at $US50 a barrel.

“There was no call that said ‘we must change our business model, we must think about the customer, we must change our cost base and we must do things fundamentally differently’. There was not one bit of discussion,” Mr Coleman said.

He said the Australian LNG industry had itself to blame for losing ground to other fuels as it developed more than $200bn of projects in the past decade.

“While we may wax lyrical about the $200bn, it actually started as $100bn,” he said.

“We shouldn’t be proud of the $200bn. We didn’t deliver on our promise, we’ve delivered a very expensive energy source.”