ROYAL Dutch Shell Plc, Europe's largest oil company, and Australia's Arrow Energy Ltd yesterday signed an agreement for a US$700-million venture to extract natural gas from coal seams to tap rising demand for cleaner-burning fuels.
The accord allows for Shell to buy a 30-percent stake in Arrow's coal seam gas acreage in Queensland state, and a 10-percent interest in the Brisbane-based company's international unit, Shell said yesterday.
It will have the right to negotiate to buy any liquefied natural gas produced from the ventures. Arrow shares jumped to a record in Sydney.
The agreement follows last week's accord by Malaysia's Petroliam Nasional Bhd to pay US$2.51 billion for a stake in a rival Australian project led by Santos Ltd proposing to use coal seam gas to produce LNG, the fastest-growing energy market. Shell was probably among the list of potential partners for the Santos project, JPMorgan Chase & Co said on April 9.
"This very obviously provides credibility for Arrow's projects," said Andrew Pedler, senior energy analyst at Wilson HTM Investment Group in Brisbane. "It is directioned both domestically and internationally, just by the character and nature of Shell."
Arrow Energy gained 46 cents, or 14 percent, to A$3.79 (US$3.62) in Sydney trading yesterday. Liquefied Natural Gas Ltd, Arrow's partner for an LNG project in Queensland state, advanced 12 percent.
Shell, the world's biggest nongovernment-owned LNG producer, will start negotiations with Perth-based LNG Ltd now that the accord with Arrow has been reached, Arrow chief executive officer Nick Davies said on a conference call with Bloomberg News. The alliance may lead to three or four LNG production units in Queensland, with the first starting up in 2011, he said.
The production units planned by the existing venture between Arrow and LNG Ltd, partly owned by Golar LNG Ltd, will be less than half the size proposed by rival ventures. The size of the units may be increased to 1.5 million tons a year from 1.3 million, LNG Ltd said yesterday in a separate statement.
The Shell-Arrow accord provides more certainty for gas supply for the Gladstone LNG project, LNG Ltd managing director Maurice Brand said in an interview. Shell may take a stake of about 20 percent in the project should it be selected as the fuel buyer, he said.
The first LNG unit will cost US$400 million, and the second would cost between US$100 million and US$150 million depending on how much later than the first it is built, he said.
Shell can't comment on any talks or plans to produce LNG from Arrow's coal seam gas fields, said Anita Harben, a spokeswoman in Perth.
Demand for LNG is set to increase by 10 percent a year through 2015, more than five times estimated gains in crude oil, as power producers switch to cleaner fuels, according to Citigroup.
LNG is gas chilled to liquid form for transportation by tanker. Coal-seam gas, mostly comprising methane, lies on the surface of coal and can be extracted when pressure on the coal seam is reduced, usually by removing water.
The Shell accord brings the number of the world's top-10 LNG producers investing in the Australian coal seam gas industry to three.