One of Australia's largest proposed LNG projects, Browse LNG, is coming under increasing threat of being scuttled by Western Australia Premier Colin Barnett who is threatening to revoke the project's state-based gas retention leases next year if plans for a floating liquified natural gas (FLNG) processing plant are selected.
The Browse project, which has cost estimates as high as $45 billion, is currently being evaluated by energy majors Woodside Petroleum (ASX: WPL), Shell (NYSE: RDS.A), BP and Petro China, who earlier this month bought out a stake previously held by BHP Billiton (ASX: BHP) for $1.7 billion.
Mr. Barnett is angry with project partners for electing not to proceed with a land-based gas processing plant at James Price Point choosing instead to investigate lower cost options including the construction of a floating LNG (FLNG) production plant.
If the project partners elect for a floating option, it will make WA ineligible for an agreed $1.5 billion package of benefits for local Aboriginal people whose land would be used for the processing plant, as well as jobs and royalties for the state.
The Browse project requires both State and Commonwealth leases to be held over the site, 425 Km off the coast of Broome. Because the Browse Basin is one-third located in WA waters a loss of State retention lease could throw the project's viability into question.
In April this year Mr. Barnett was quoted by The West Australian saying that "it should not be assumed that the retention of Commonwealth leases automatically means the same treatment of State leases." He continued to warn that any offshore proposal will be evaluated "entirely from square one".
In addition to the loss of benefits for the state, the Premier has also raised questions about supply reliability and safety of FLNG production in the cyclone-prone area, claiming the disruption caused by de-coupling the processing vessel from the seabed and evacuating crews was a concern to the projects customers. These risks have been down-played by analysts.
Research by the Department of State Development and Citigroup have put the profit margin for a floating facility at 13.1%, compared to 11% for onshore processing at James Price Point, according to The West Australian, making a floating option highly favorable.
Foolish takeaway
Woodside and its partners will find support from investors for the project that provides the best return on investment. However with the WA government acting as a significant stakeholder in any project that goes ahead, careful compromise between all parties may be the only way forward.
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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.
