Woodside's 'use it or lose it' dilemma

WITH Woodside already tagging a "for sale" sign on a stake in the Browse LNG project, there is increasing industry speculation about whether it can hold on to its permit after its retention lease expires in 2014.
Woodside's 'use it or lose it' dilemma Woodside's 'use it or lose it' dilemma Woodside's 'use it or lose it' dilemma Woodside's 'use it or lose it' dilemma Woodside's 'use it or lose it' dilemma

At the heart of industry chatter is the "use it or lose it" policy under which if a permit holder does not fulfil certain conditions imposed upon it as part of the exploration licence - such as carry out a specified work program so that the field can be commercialised - then the government has the right to refuse licence renewal.

The "use it or lose it" policy is aimed at discouraging resource warehousing where companies hold tenements without developing them, which could potentially cost states significant royalty loss.

While most industry sources agree that Woodside could get special dispensation given the Browse project has the political blessings of WA Premier Colin Barnett, they now wonder if Woodside will be able to demonstrate the non-commerciality of Browse, should they need a retention lease renewal.

"If you read the law quite literally they can apply for a renewal but it is provided that everything is deemed as non-commercial," a sector lawyer familiar with the issue told EnergyNewsPremium .

"And it is hard to look at this and say it isn't commercial."

The source said that while it would be hard for Woodside to demonstrate that the resource wasn't commercial, what would be crucial to Woodside holding on to the licence would be its ability to prove that circumstances, such as securing tenure environmental approvals, were beyond its control to give a go-ahead for the project within the agreed time frame.

The Browse project, which entails a gas processing hub at the Kimberley, is strongly opposed by environmentalists, who argue that a resources project at the area could potentially damage the sensitive local ecosystem.

"I suspect that those are the reasons that will be of interest to the government. If those are seen as the principal cause of delay, then I think the use it or lose it will not be softened for them," the source said.

Already, Woodside has appealed for a waiver of certain conditions of the current retention lease including delaying the FID, which was due middle of this year. And now it emerges that the company is looking to sell down its stake, which again reinforces perceptions that progress on Browse is not on track.

Industry sources say that any decision by Woodside on Browse will be pushed back towards the end of the retention lease period in 2014 and that the WA government will opt to support either an extension of the lease or renewal.

"I don't think there are any repercussions until 2014 when the retention leases come up," Merrill Lynch analyst David Heard told ENP recently.

Some observers believe that the government has the ability and willingness to be flexible about Woodside's Browse problem. They point out that the Barnett government did browbeat the joint venture partners in agreeing to choose James Price Point as the landfall for Browse gas.

"The government possibly embarrassed themselves by banging the table last year," Tri-Zen principal consultant Tony Reagan told ENP.

He added that since the government overplayed its hands previously, it might suit the situation better to be subtle and discreet next time while giving an extension.

"I think they'll quietly delay and quietly rethink," Reagan said.

Other sources say that the government will take a free reign to change conditions on the retention lease.

"The WA government will be so incentivised to make sure that this goes as smoothly as possible that they will do what they can to make sure there is assistance for them," the lawyer source said.

But WA Department of Petroleum executive director Bill Tinapple recently told ENP that while WA does support the use it or lose it policy, any final decision will be made in Canberra.

"Given, the Commonwealth's takeover of the designated authority role starting this year, any final decision regarding the policy will be made by the Commonwealth government," he said.

"While Western Australia will still participate in joint authority decisions, at the end of the day the final decisions rest with the Commonwealth minister."