AUSTRALIA UPS PRESSURE ON BIG LNG PROJECT PARTNERS

C O N F I D E N T I A L SECTION 01 OF 02 CANBERRA 001092

NOFORN
SIPDIS

STATE FOR S/CIEA GOLDWYN, EEB/ENR MONOSSON
DOE FOR MARKOWSKY, SKEER
COMMERCE FOR 3132/USFCS/OIO/EAP/JRULAND,
4538/MAC/EAP/OPB/GPAINE

E.O. 12958: DECL: 12/12/2019
TAGS: ENRG EPET ECON AS
SUBJECT: AUSTRALIA UPS PRESSURE ON BIG LNG PROJECT PARTNERS

REF: A. CANBERRA 630

B. PERTH 40

C. PERTH 54

Classified By: POL/ECON COUNSELOR EDGARD KAGAN, REASONS 1.4(B)(D).


1. (SBU) Summary: The government is fulfilling its pledge
to strengthen "use it or lose it" policies to encourage
faster development of LNG resources. Resources and Energy
Minister Martin Ferguson announced December 4 that Browse
Basin LNG project joint venture (JV) partners Woodside, BHP,
BP, Chevron and Shell must develop a plan to produce LNG
within 120 days, as a condition for extending for three years
their retention leases on gas fields in the project. Ferguson
also canceled the retention lease on a small field that is
part of the Pluto gas project. More decisions shortening or
canceling retention leases are expected in the near future,
some of which may impact U.S. companies, particularly Chevron
and ExxonMobil. End Summary.


2. (SBU) Retention leases for LNG fields have been granted
since the 1980s to allow companies to hold rights to exploit
a resource over a long period. Previous policy had been to
routinely renew retention leases for 5 years. Since 1985,
only one of 58 retention leases has ever been overturned by
the government. The government announced this year that it
was reviewing policy on these leases and released a
discussion paper in June (ref A).

GOVERNMENT CONDITIONS ON LEASES
--------------


3. (SBU) Minister Ferguson announced on December 2 that he
was placing a 120-day deadline on Browse JV partners to come
up with a "development theme" as a condition of extending
seven retention leases for a period of three years. Ferguson
also turned down the renewal of a retention lease on the
Dixon field, part of the Northwest Shelf JV between Woodside,
BHP, Chevron, BP, Japan Australia LNG, and Shell. Ferguson
gave the Northwest shelf partners one year to apply for a
production permit at the field.


4. (SBU) Both decisions put pressure on JV partners to
develop plans for bringing LNG from these projects into the
market quickly. The Browse project particularly has been
slow to develop, largely because of differences over whether
to use existing gas infrastructure or pay to develop a new
processing facility at James Price Point (ref B),a plan
favored by Woodside. Driving the government's decision is
concern that major international oil companies are using
Australia's relatively lenient reservation lease policy to
sit on reserves rather than bring them into the market. The
benefits of constructing large projects for the local economy
and Western Australian government are also substantial.

UNPRECEDENTED INTERVENTION?
--------------


5. (C/NF) Australian Petroleum Producers and Explorers
Association (APPEA) Director for Exploration and Access Ranga
Parimala told econoff on December 7 that the decision was an
"unprecedented interference" by the government in a project,
intended to force Browse partners to choose Woodside's
preferred development pathway. In Parimala's view, the
Qpreferred development pathway. In Parimala's view, the
Browse JV partners would have no chance to develop a credible
alternative in 120 days and would either accept the James
Price Point plan or seek to walk away from the JV project.


6. (C/NF) Ferguson's Energy Advisor, Tracy Winters, said
December 9 that the government would not allow companies to
build portfolio investments by sitting on Australian
resources over a long term. Winters suggested it would be a
good thing if some of the most reluctant partners pulled out
of contentious and slow-developing deals, as "there are
plenty of investors ready to fill in their places." More

CANBERRA 00001092 002 OF 002


decisions like this are coming, Winters said, including a
review of Chevron's large Wheatstone project retention leases
(ref C). According to Winters, timelines and conditions like
those in the Browse decision would be a model for future
decisions. A formal policy statement was being drafted, but
was delayed within the Department of Resources, Energy and
Tourism.

WOODSIDE A WINNER
--------------


7. (C/NF) Chevron's External Affairs Manager for
Wheatstone, Mike Edmondson, told CG Perth that the decisions
reflected Ferguson's long-standing views on "use it or lose
it" provisions and Woodside's lobbying to put pressure on its
partners. He said the decisions are unprecedented and
concerning. Overly prescriptive rulings on retention leases
would increase the sovereign risk of investing in Australia.
Companies like Chevron are already worried about labor and
equipment delays in the heated Western Australia LNG market,
which could also run up against government deadlines.
Winters said companies with credible reasons for delay could
work with Ferguson to obtain more time.


8. (C/NF) BHP Billiton Vice President for Government
Relations Bernie Delaney previously told us that his firm is
strongly opposed to the changes in retention leases, which
are likely to push companies such as Chevron and BHP to use
existing Woodside infrastructure in the Northwest Shelf, and
to develop the new James Price Point complex. Delaney said
that BHP and several other partners in the Northwest Shelf
venture (which is operated by Woodside) are very frustrated
with Woodside's operating style and would much prefer to
build their own processing facilities. This leaves Woodside
sitting on very expensive processing assets without a long
term supply of gas. Delaney believes that the Government
policy is driven in part by a desire to minimize the number
of complicated environmental approvals that would slow
development in the Northwest. He also noted that the
retention leases for the Browse project contain caveats that
give the partners greater flexibility, such as requiring that
they be in a position to make a final investment decision
within three years rather than demanding such a decision in
120 days.


9. (SBU) Comment: The clear winner in the initial set of
decisions by Ferguson is Woodside, whose reluctant JV
partners in two projects will likely be forced to accept
Woodside's two preferred development options. More decisions
are expected early in 2010, but the government has shown that
the previous lengthy retention policy is no longer an option.
End comment.

BLEICH