2nd UPDATE: Arrow Buys Entire Fisherman's Landing LNG Project
11 February 2010 - 5:23PM
Dow Jones News
Arrow Energy Ltd. (AOE.AU) said Thursday it will take full
control of the proposed A$2 billion-plus Fisherman's Landing
liquefied natural project in Queensland state, potentially
increasing its exposure to fast-growing Asian energy markets but
placing further pressure on its balance sheet.
In a complex deal, Arrow will buy out smaller company Liquefied
Natural Gas Ltd.'s (LNG.AU) interest in the project with a
combination of cash, milestone payments, royalties and options over
Arrow shares.
Arrow sold 30% of its coal seam gas acreage to Royal Dutch Shell
PLC in 2008 but has been rapidly proving up its remaining reserves.
Chief Executive Nick Davies reiterated recently that Arrow could
have enough gas to help feed Shell's proposed LNG project in
Queensland as well as the Fisherman's Landing project. "In my mind,
the two have always been completely doable," he said in an
interview earlier this month.
Arrow on Thursday provided a clear cost estimate of the full
upstream, midstream and downstream components of a one-train
Fisherman's Landing project of A$2.1 billion-A$2.2 billion. The
first production unit is slated to produce 1.5 million metric tons
of LNG a year.
The cost guidance seems quite optimistic compared to analysts'
expectations, with Merrill Lynch recently estimating a two-train
project could cost about A$5 billion to build.
A final investment decision for the upstream and midstream
elements of the project is still expected by March 31., but a
decision on the LNG processing plant may come later, pending an
assessment of any "enhancement opportunities," Arrow said.
Arrow's investor relations manager, Andrew Barber, said such
enhancement opportunities weren't about expanding the project's
size.
"Down the track we'll obviously be looking at a second train,
but these opportunities are more about finessing how the plant
interacts with the pipeline and gas field development, now that we
have an integrated project rather than a joint venture operation,"
he said.
The cost of the LNG Ltd. deal is difficult to work out because
the terms of the transaction have many moving parts.
It involves Arrow reimbursing LNG Ltd. for costs incurred to
date of A$45 million, and it paying a US$10 million licensing fee
for using LNG Ltd.'s gas liquefaction technology at the first LNG
train's completion, and US$10 million for each extra train.
Milestone payments comprise A$24 million when Arrow makes a
final investment decision on the first train, another A$24 million
when the project produces its first 1 million tons year of LNG,
expected in late 2012, and A$63.5 million when it first produces 3
million tons.
LNG Ltd. will also get an option to acquire 12.5 million Arrow
shares with an exercise price of A$3.50 and May 14 expiry date,
giving it a potential 1.6% stake in the company.
The most complex part of the deal is the royalty payment
plan.
LNG Ltd. said it will get royalties of about 0.9% on the first
1.7 million tons of LNG produced from the project each year,
calculated on the difference between the oil price at the time of
each LNG shipment and US$60/barrel.
For the next 1.8 million tons, it would get a 0.9% royalty based
on the difference of the prevailing oil price and US$50/barrel.
LNG Ltd. Managing Director Maurice Brand said the company will
have about A$85 million cash after the first payments from the
transaction. With further milestone and royalty payments, he said
the company will be well placed to actively market its gas
liquefaction technology and pursue "other mid-scale LNG
opportunities".
Brisbane-based Arrow confirmed Feb. 2 that it has hired advisers
to examine funding arrangements for Fisherman's Landing, including
sourcing more debt, issuing new shares, or selling down part of its
interest in the project. Those arrangements haven't changed, Davies
said Thursday.
Five separate ventures, including Arrow's and Shell's, are
planning to build LNG projects at the Queensland port town of
Gladstone, each to be fed with coal seam gas.
The unconventional fuel has never been turned into LNG for
export before and Arrow is well placed to be the first, considering
that it has a smaller project that's on a tighter timetable than
its rivals.
Arrow's move to increase its holding of the Fisherman's Landing
venture isn't entirely surprising. In January, it said it intended
to take up to 100% of the project's first LNG train and 30%-49% of
the plant's other infrastructure.
-By Ross Kelly, Dow Jones Newswires; 61-2-8235-2957;
ross.kelly@dowjones.com
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