The prospects of the gas boom are tantalising. The Browse gasfields lie off the coast of Western Australia stretching over the 140,000 square kilometre basin. This huge underwater province is home to the biggest dream of some of Australia and the world’s largest oil and gas producers.
How then did small Australian explorer Nexus Energy find itself launched into one of the biggest of the big-time underwater drilling ventures?
Nexus owns the sizable, yet remote, Crux and Echuca Shoals gasfields in the Indian Ocean off the north-west coast of Australia. But to develop them it needs deep pockets, which it doesn’t have. Yet last week came the announcement that this minnow would link into a great venture that would involve a world-leading floating production ship – a technology designed to bring plentiful, but distant, deposits of gas and condensates within reach of Asia’s energy consumers.
Behind the commercial announcement are some powerful politics. This venture has been made possible by the marriage of Nexus Energy, with its strategically important fields, with the huge global capital and technological might of Shell. What has been little understood, however, has been the role of celebrant Martin Ferguson, federal Minister for Resources and Energy, who pressed the partners behind the scenes into a staged and integrated development process that is consistent with the terms of the federal government’s “use it or lose it” rules governing oil and gas leases.
In the wings behind Ferguson is former prime minister Paul Keating, now chairman, corporate advisory, international, at Lazard that advised Nexus on the deal.
Just don’t suggest to Ferguson for one minute that he has arranged the tie-up of some of Australia’s huge oil and gas wealth to benefit a local over a foreign owned company. This is no local leg-up, he insists.
“I am sympathetic to Australian companies, but that doesn’t influence my decision-making under the act”, he tells the Weekend Financial Review.
Under federal government legislation, Ferguson has the final say over approvals of oil and gas production licences and retention leases, which are first processed through state governments. This would prove the deal maker.
Ferguson says he was motivated by broader “national interest” concerns.
He wanted to show the world that Australia could exploit its remote lucrative gas fields in a cost-effective way using world leading massive floating liquefied natural gas (LNG) platforms.
“The project is very important for the national interest. It plays into Prelude and getting up Prelude will be to the long-term advantage of Australia”, Ferguson says.
“It will be a huge operation and a lot of other companies will be watching to see how it goes. It could be the first of a range of floating fields in remote offshore areas, previously not thought of as commercially possible to develop,” he says.
The Prelude venture – in the gas-rich Browse Basin – will showcase technology that he says “is very important to Australia’s future development of the offshore industry”.
Beyond Ferguson’s dream were the gritty details of how he helped stitch the deal together. When faced with one small Australian company, Nexus Energy, with limited resources to exploit its Crux field and one giant foreign owned oil major, Shell, with lots of capital and but not enough resources to underpin its Prelude floating LNG project, Ferguson acted.
It would have helped that Keating well understood the challenge Nexus faced: small companies just do not have the leverage to force big multinationals such as Shell into their arms. This was only too painfully obvious as two years of protracted negotiations between the companies failed to land a result. For this small company the government offered a way to get Shell to the table.
After two years of negotiations seemingly made little progress, Ferguson moved behind the scenes, putting pressure on Shell and Nexus to work out a deal in which both would win.
The Crux resource is complicated – it has oil held within the gas and Shell did not want the gas, and still does not, until 2023. Pumping out the gas to get to the oil, which Nexus could sell immediately, and then re-storing the gas for years was beyond the financial capacity of tiny Nexus. This meant Shell could sit back and wait until Nexus was forced to hand over the gas.
Yet Ferguson had a bargaining chip – he knew Shell needed the Crux gas to augment the shortfall at its own Prelude gas fields, but Nexus held the production licence over the field, not Shell, and Ferguson would not waive the “use it or lose it” rule just to suit Shell.
In effect, unless Shell agreed to a contract that included Nexus and allowed an integrated development of the liquids and the gas, Shell would lose the right to the gas and the government would let in other oil majors to bid for the resource.
The deal was done. Shell agreed. As one person close to the deal observed: “If the government had simply bent over, a little Australian company would have disappeared. They [Nexus] found the gas and proved it up and they would have given the whole thing over to Shell. Now you have got the right result and you are pumping out the gas and liquids once not twice.”
All parties agreed to a “staged development” of the Crux resource that would not contravene the “use it or lose it” approach required under the federal government’s retention lease regime.
“From the national interest point of view this meant the project was deliverable,” Ferguson says.
“It will use technology very important to Australia’s future development of the offshore industry where floating fields are like a huge ship and can be moved from field to field – even around the world.
“I give Shell full marks for this – it is a big risk, only big players like Shell have the potential to develop these sorts of fields commercially.”
So Nexus last week signed a non-binding heads of agreement with Shell Development and Osaka Gas to pursue the integrated development of the Crux gas and liquids project, as an add-on to Shell’s $13 billion Prelude venture.
Under the agreement, Nexus handed over ownership of 80 per cent of Crux, 600 kilometres north of Broome, to Shell – for no cash cost – which will now develop and operate the project. Nexus will own 17 per cent and Japan’s Osaka Gas, Nexus’s original 15 per cent partner in the venture, 3 per cent.
Shell, which already owned the rights to the gas at Crux thanks to a cheap deal with Nexus in 2006, gained certainty over its access to the valuable resource, which will be added into Prelude once gas at that field runs down.
While not huge, Crux still holds about 2 trillion cubic feet of gas, in addition to about 75 million barrels of condensates or light oil, which would be a valuable back-up for Shell’s own gas in its Prelude and Concerto deposits, already slated to be produced through the floating plant.
Shell made a final commitment to develop Prelude last May, but successful development still depended on certainty over the gas in Crux as part of the venture.
“Shell took the final investment decision on Prelude on the assumption it could put Crux gas in there,”one industry source says.
“Ferguson knew it was in the best interest to bring the resolution of the Crux issue forward and took a keen interest in it. He wanted to see a Crux deal done.”
Ferguson kept closely abreast of developments through the negotiations. Shell has an active government relations team in Canberra, while sitting on Nexus’s board is John Hartwell, the head of the resources division within the federal Department of Resources, Energy and Tourism until he retired in August 2010.
Significantly, the deal with Shell, which is due to be firmed up in April, gives Nexus a 12-month option to sell another 2 per cent in the venture to the oil major, for $75?million.
Using that figure, the whole project is worth about $3.75?billion, valuing Nexus’s 17 per cent stake at a massive $637 million, about double Nexus’s market capitalisation.
Nexus chairman Michael Fowler said the deal “converts Nexus’s interest in Crux into a highly attractive asset of global relevance”.
Shell declined to comment on Ferguson’s involvement in the negotiations but said that a combined development of both the gas and liquids resources at the Crux field would be better than developing the liquids first, then the gas.
“An integrated development will reduce capital expenditure, increasing profitability and returns to Government,” a spokeswoman said.
It was a spectacular journey for Nexus, which in 2002 was capitalised at just $2.5 million with no viable assets.
Three years later, the company’s second chief executive Ian Tchacos bought the Crux field for $10?million plus $2 million in Nexus shares.
But its plans to develop the field have not gone smoothly.
Nexus had been seeking a partner to develop the condensates resource at Crux ever since 2006 when it sold its gas rights to Shell for a mere $52 million.
Its idea was to extract the gas from the offshore field, strip out the light oil for sale as a premium grade of crude, and pump the gas back into the reservoir for Shell.
But a $255 million deal with Mitsui collapsed in the middle of the financial crisis, and subsequent efforts to forge a partnership came to naught.
The company’s management was plunged into high drama with the former managing director Richard Cottee departing suddenly in September after a tussle with chairman Michael Fowler.
Not helping Nexus in its negotiations with potential partners were the terms of the deal with Shell, in which it had to hand over all the deposit to the oil major at the end of 2020, so Shell could access its gas reserves, plus any remaining condensates.
That deal has been overtaken by the latest agreement with Shell.
But at the time, the timeline put mounting pressure on Nexus to clinch a deal for Crux and start producing as soon as possible to get as much value from its $1.4?billion project before having to transfer ownership to Shell.
As time went on, the value of the asset was declining by the day.
Another hurdle was Nexus’s 15?per cent partner in Crux, Osaka Gas, which had serious doubts on the concept of an early condensates project and favoured all along a combined gas and liquids venture with Shell.
By late last year Nexus had talked to several potential partners for the liquids project, and had narrowed the field down to one, a Chinese group. Fowler told shareholders about the potential Chinese partnership at the AGM in Melbourne in November, increasing the pressure on Shell to come to the table to negotiate.
That accord was finally reached last week, but several issues remain unresolved, including the production licence at Crux, which will need to be converted back into a retention lease because of the later development schedule.
Still unclear too is how much Nexus and Osaka Gas will have to pay Shell to process their liquids from Crux through the Prelude project.
Another factor is the estimated $2.5 billion it will cost to connect Crux into Prelude, and how Nexus will finance its share.
The revelations that Ferguson had played a part behind the scenes in making the deal happen, raised questions about whether the federal government was on the lookout for boosting participation by Australian companies in the development of the rich offshore gas fields that are dominated by foreign-owned oil and gas majors.
They come as Australian-owned Woodside Petroleum struggles to get support from its oil major partners for the James Price Point gas processing hub on the Kimberley coast for its Browse LNG venture, suggesting it could yet lose that slice of the rich offshore gas pie.
Some observers even saw signs that the federal government could be influenced by the kind of considerations driving the Howard government’s decision 10 years ago to block Royal Dutch Shell’s $10?billion takeover bid for Woodside Petroleum on national interest grounds.
The idea was that Woodside was protected from the takeover because it was the great local hope for a stake in the expected gas bonanza from the vast fields off north-west Australia.
Ferguson says he is influenced only by the “national interest” and insists this does not mean promoting the interests of Australian companies per se.
He never gets involved in the commercial or monetary aspects of such deals, but he likes to keep the door open to business executives in the industry.
“I am continually talking to the industry and they are raising their problems with me,” he says.
Another plus for the Nexus project was that it would deliver a big return for taxpayers under the Petroleum Resource Rent Tax regime, Ferguson said.
He says the country is now on track to jump from the fourth largest LNG exporter, to the No. 1 or No. 2 spot in 2017-2018. Already there is $180 billion committed investment in gas projects in Australia.
But to make the leap, the projects have to happen and Ferguson sees it as his role to help in any way he can.
The Australian Financial Review
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