Shell, PetroChina take $500m writedown hit on Arrow Energy as climate change bites

Energy giants Shell and PetroChina have been hit with $500m in writedowns on their Queensland gas business, with the duo’s losses reaching $10bn since 2010.

A worker at Shell’s QGC-operated Queensland Curtis Liquefied Natural Gas (QCLNG) project site in Gladstone. Picture: Getty Images

Energy giants Shell and PetroChina have been hit with $500m in writedowns on their Queensland gas business partly due to a decision to cut their oil and gas price forecasts as a result of the long-term effects of climate change – with the duo’s losses reaching $10bn since 2010.

Shell and PetroChina’s Arrow Energy joint venture slumped to a $1.05bn loss for the 2021 financial year after a $606m loss the year before, marking another difficult period amid impairments and a weak Australian dollar.

Losses since the Arrow venture was formed in 2021 have now reached just under $10bn, or more than $14bn when combined with $4.4bn of acquisition costs, including the $3.5bn paid by the two energy producers to acquire Arrow a decade ago.

Arrow’s $504m writedown was due to several reasons including a weaker Australian dollar and its decision to incorporate climate change into its oil and gas price forecasts, part of broader pressures on big energy players to recalibrate the long-term future of fossil fuels, given the urgent need to cut global pollution.

Shell, which owns 50 per cent of Arrow, has previously said that oil production has peaked but it remains one of the world’s biggest investors in LNG, a global market that’s likely to boom for the next few years amid uncertainty caused by Russia’s invasion of Ukraine.

Arrow would not disclose its new price forecasts but said the decision to factor in climate change reflected the lead taken on the issue by its two owners.

“Arrow recognises the need to minimise its emissions footprint and the strategic, regulatory and operational risks associated with climate change, and we continue to incorporate these into our corporate strategy and risk management processes and practices,” an Arrow spokesman said.

“Arrow regularly assesses the potential impact of climate change on our asset portfolio to ensure investment decisions reflect our shareholding companies’ direction on responding to climate change.”

Environmental pressures have been accelerating in the last 12 months as investors and regulators hike their expectations for energy producers to directly combat climate change.

Shell, owner of major Queensland and West Australian LNG projects, was found by a Dutch court partially responsible for climate change and ordered to sharply cut carbon emissions in a landmark case last year. The company has now filed an appeal against the decision. Shell plans to have net-zero emissions by 2050 while PetroChina has set an ambition for “near-zero” emissions by the same time.

EnergyQuest chief executive Graeme Bethune.

Arrow’s 2021 accounts for the earnings period to December 31, lodged with the Australian Securities & Investments Commission, showed Shell and PetroChina converted $US1.26bn ($1.75bn) of loans taken in 2012 and 2013 into $1.75bn of equity in Arrow after the loans were due for repayment during the year.

Gas and power revenues rose 60 per cent to $359m, while it suffered a $208m foreign exchange loss due to the weaker Australian dollar hitting US dollar-denominated loans. The result also reflected investment in its $10bn Surat coal-seam gas project which plans to bring an extra 5000 petajoules of gas to the market over the next 27 years.

Development of Arrow’s gas resources remained important in order to feed Shell’s QGC export plant in Queensland’s Gladstone, EnergyQuest chief executive Graeme Bethune noted.

The QGC venture will buy supplies from Arrow to feed its Queensland LNG export plant in Gladstone and industrial users on the nation’s east coast.

North Asian LNG market prices have soared beyond $US30 per million British thermal units amid global concerns over energy security while outages at coal-fired power stations have pushed up gas prices on the east coast of Australia. Spot gas prices hit $19.31 a gigajoule in Brisbane on April 9, according to the consultancy EnergyQuest, helping send wholesale electricity prices up to an average $232 a megawatt hour in Queensland and $211 a megawatt hour in NSW.

 

The initial $2bn Surat phase will add 100 petajoules of gas annually from 2021 at peak production, equating to 16 per cent of total east coast demand.

The broader $10bn project will run until 2047, with Arrow staggering the drilling of 2500 wells through three phases.

Gas will be piped to the QCLNG export project in Gladstone owned by Shell, China’s CNOOC and Tokyo Gas. Shell bought into Arrow Energy in 2008 and two years later took over the whole company in a 50-50 joint venture with PetroChina.

Arrow in a statement said the 2021 result reflected “the ongoing operation of existing gas supply and electricity generating businesses, the ramping-up of execution activity on the first phase of the Surat Gas Project on new wells and facilities and the work being done to create further investible project proposals on tenure in both the Surat and Bowen basins of Queensland”.

Arrow has experienced issues dealing with local landowners and in March was hit with a $1m fine from the Queensland government for breaching land access rules.

Originally published as Shell, PetroChina take $500m writedown hit on Arrow Energy as climate change bites