Subject: Phillips hits a tax treaty snag on Timor Gap

Also: Sunrise the key to Shell Australia LNG fortunes

Energy Day

March 28, 2002

Phillips hits a tax treaty snag on Bayu-Undan

From Damon Frith,

Perth

Phillips Petroleum has hit a last-minute snag in the long saga to develop the Bayu-Undan gas and condensate field in the Timor Sea.

The Australian Taxation Department has refused to sign a tax sharing treaty agreed to by Phillips and the East Timor government.

Bayu-Undan sits 500km off the coast of Darwin and is in disputed territorial waters between Australia and East Timor.

Both countries need to sign a tax and fiscal package for the project before it can proceed.

Australia was believed to have agreed to let East Timor receive 90% of royalty revenues from Bayu-Undan, but the agreement signed with Phillips reportedly gives the impoverished country 95%.

East Timor said it requires the matter to be resolved quickly so it can meet a May 20 deadline to have the necessary legislation in place.

The Australian government said it was confident the matter could be resolved in time for the project to proceed.

Phillips has a 17-year agreement with Electric Power Company and Tokyo Gas Company of Japan to supply 3m tpa of LNG.

The supply agreement commits nearly all 3.4 tcf of Bayu-Undan gas reserves, with first cargoes due for delivery in January 2006.

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Energy Day

March 28, 2002

Sunrise the key to Shell Australia LNG fortunes

With huge gas reserves, groundbreaking technological

solutions to develop those remote reserves and tricky politicaland corporate interests to juggle, the job of Shell Australia's chairman is never dull.

Damon Frith reports from Perth on outgoing chair Alan Parsley's thoughts on the exploration potential, the markets for all that gas and what next in the Shell-Woodside two-step

Shell Australia chairman Alan Parsley has a simple task - to find a home for 100trn cu ft of some of the world's most remote gas in a world awash with undeveloped reserves and project-hungry competitors.

It is a task Dr Parsley has no hope of completing. Shell will shortly announce his retirement and replacement by Tim Warren. Mr Warren is currently director of Shell Technology E&P.

However, until his departure date in July Dr Parsley is maintaining an active programme to progress, as far as possible, the next wave of Australian-based LNG developments.

The 100 tcf of gas up for development is not all Shell's, but the company has its finger in a large portion of the reserve pie, and would like to channel the remaining reserves through its own facilities and into markets of its choosing - control is a good thing.

In the Timor Sea, one gas field has just slipped through its fingers. Phillips Petroleum has done a deal with two Japanese utilities to supply 3m tonnes per year of LNG from its greenfield Bayu-Undan field from 2006 onwards.

Near Bayu-Undan lies Shell's Sunrise gas field. Shell has already put forward a proposal to develop the field using the world's first floating LNG (FLNG) plant. It's an ambitious task that must overcome some brain teasers on the technical side but its success could provide the key Dr Parsley needs to unlock other reserves in the Carnarvon and Browse Basins off the coast of Western Australia and the Northern Territory.

Shell's partners in Sunrise are Woodside Petroleum and Phillips. Woodside is openly supporting the FLNG proposal but Phillips has yet to come to the party.

The Shell man says: "Sunrise will be critical.

"If we get agreement to go that route and develop it successfully, I think it will demonstrate to east Asian buyers that LNG from floating facilities is just as good as onshore.

"While the first FLNG project is targeted at America, opportunities to develop the next FLNG project from Australia might go into Asian markets.

"We might look at Brecknock and Scotts Reef (offshore Western Australia) as one of a number of possibilities (for FLNG), it might be a way of getting that field going," he tells Energy Day.

The 20 tcf Greater Gorgon gas field in the Carnarvon Basin (offshore Western Australia) is also high on the list for development and is expected to follow Sunrise for a green light.

Originally Gorgon had been expected to be a satellite field for the expanded North West Shelf (NWS) operations at Karratha but Dr Parsley says it could be developed as a stand-alone operation.

Unless Shell gets obsessed about FLNG platforms it would likely be developed with an onshore plant.

The timing for Gorgon will rely heavily on Shell's ability to win a 3m tonne per annum tender currently under way in the southern Chinese province of Guangdong.

Shell has been shortlisted with two other projects as the potential supplier, and feels confident it will get the contract. The contract would form the foundation for construction of a fifth LNG train at the NWS project on the Burrup Peninsula in Western Australia.

The train would have a capacity of 4.2m t/y and would boost NWS output later this decade to 16m t/y. Gas for the new train would come from existing NWS fields.

Main competitors

Dr Parsley considers the two main competitors for the Chinese contract were knocked out in the first round of bidding.

China is a potentially huge LNG market and, if Shell gets its foot in the door by winning the 3m t/y contract, Dr Parsley believes other opportunities will become available.

Evans Shoal and the new Blacktip discovery, which lies in the south of the Bonaparte Basin in the Timor Sea and holds about 2 tcf of gas.

Dr Parsley believes the surrounding region will yield further discoveries.

"There are a number of prospects that look really exciting. With our partners we would like to explore the region over the next couple of years," he says.

Woodside Petroleum is a partner in Blacktip and has stated publicly it wants to see Blacktip developed as a domestic gas supply to Darwin, and via pipelines, the east coast of Australia.

A domestic development would diffuse a potential hurdle Shell faces in its FLNG development.

The Northern Territory government is putting pressure on the federal government to force Sunrise to be developed as an onshore project with a domestic gas component. So far the federal government has said it will not intervene.

Dr Parsley breaks the market regions for LNG into three hemispheres - Europe, Asia and the US.

He views Europe as a mature market, one that is well established but still growing and facing fierce competition from established gas pipelines across the continent.

The US is a new and rapidly growing market, and of immense interest to Shell.

"Doing business in the US is different," says Dr Parsley. "The US is almost a spot market, with short-term contracts and moveable prices. The European market is becoming deregulated and is evolving in the same direction - gas supplies from Russia and Norway make it very competitive.

"The US market is not unlimited but as long as LNG supplied into the gasification plants being built can compete on price with domestic gas, then there is an opportunity to develop a few projects," he says.

Globally Shell is making a two-pronged attack on the US gas market.

Australia is invading the west coast while another FLNG project poised for development in Namibia is aimed at east coast markets.

Asia is a more traditional market that offers the opportunity to sign long-term contracts linked to the oil price. However, with the exception of Japan, the region's instability and dramatic boom and bust economic cycles have made it a difficult market to enter. Shell is hoping its big break in Asia will come from China.

The Woodside factor

Sitting in the background and involved with almost all Shell's upstream activities in Australia is Woodside Petroleum.

Shell, which has a 34% stake in Woodside, has made two unsuccessful takeover bids for Woodside. The last bid was knocked back by the Australian government on the grounds it would be incorrect to allow a foreign company to own such a large slice of the country's oil and gas reserves.

Some cynics believe it was simply a politically motivated decision made during an election period and followed strong lobbying by Woodside to quash the bid.

The end result was a strained relationship between the two companies, made all the more difficult by Woodside's desire to expand its oil exploration globally.

Shell's desired path for Woodside was for it to concentrate on gas production and exploration in the Australasian and eastern Asian region.

As part of the reconciliation process Shell has been making noises to appease Woodside.

Dr Parsley says: "The situation is very clear. We have to recognise that Woodside, as a company, has to go for growth in order to satisfy its shareholders needs.

"Although we have always said we prefer it to focus on Australia and east Asia, we recognise they want to push out into other parts of the world in order to achieve this growth.

"Talks are now on as to how we manage that situation, so both companies can work effectively and avoid conflict. It's not easy but we're having constructive discussions."

One way to diffuse the tension is to have Woodside take an active interest in Shell's global exploration and development activities.

Dr Parsley says an "excellent way of avoiding conflict" was for Woodside and Shell to work together in regions in which they would otherwise compete. How far down that path Woodside wants to go is unclear. The more it gets into bed with Shell the more certain it is to one day find itself on the end of a third takeover offer.ALANUntil his departure date in July he is maintaining an active programme to progress, as far as possible, the next wave of Australian-based LNG developments


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