Slugcatcher: Is BHP playing the LNG game?

If Japan and China are keen to buy more liquefied natural gas from Australia, and the U.S. is knocking on the door, why do we appear to have a go slow with the fifth train expansion of the North West Shelf?

This is a question Slugcatcher finds fascinating for two reasons. One, we have genuinely entered an energy sellers market where it becomes possible to play a game called “screw the buyer” and two, a dispute could be emerging within the Shelf partnership over which project gets developed next.

Screw the buyer, which appears to be one of the favourite games being played across the oil patch, probably wins most votes simply because it is such an easy choice.

The Arabs have been playing it for the past 30 years in the way they fiddle with oil supplies to gain a few extra squillion dollars – so why wouldn’t LNG producers learn from the masters and make a few delaying sounds when you know customers have their tongues hanging out for extra shipments.

Slugcatcher thinks this is a fine theory which sits comfortably with comments from BHP Billiton Petroleum boss Phil Aiken, who was quoted as saying that a train five decision “is unlikely to be made until the first half of next year”.

Other members of the Shelf consortium, including Woodside chief executive Don Voelte, wanted a decision by Christmas.

Aiken’s comments were attributed to a “pricing review” currently underway with the venture’s Japanese customers, which was deemed sufficient to push train five into the background.

Slugcatcher can just imagine how the negotiations are going. The Japanese are asking for more LNG and offering a modest increase in price. The Shelf partners are pointing at the oil price, the coal price, the uranium price – and saying ‘now it’s your turn to be slugged with a whopping hike in the LNG price, and until you pay it, no train five.’

But, behind this simplistic view of the world lie two other factors. First, the nature of the LNG market is changing and it is becoming more of a tradeable commodity with less emphasis on closed loop shipping arrangements, which will open the game to more players. Second, BHP Billiton is pushing its own barrow with a project which could earn it fatter profits than simply by going along with train five.

Slugcatcher reckons that perhaps, just perhaps, Aiken has an eye on the studies underway into the proposed Scarborough LNG development when talking about train five on the Shelf.

It is possible that by putting the brakes on train five the team at BHP Billiton can rush through its studies into Scarborough and submit an alternate plan to the hungry Japanese buyers, or buyers elsewhere.

Everyone involved would, naturally, deny that such a game is being played even if it appears to be rather obvious that BHP Billiton could do a lot better with 50% of a Scarborough project than 16.67% of train five.

Devilish as this suggestion might sound it does sit rather comfortably with another quote attributed to Aiken: “We see LNG as a very strategic growth product for BHP Billiton in the future and we’ll look at a number of options in that area”.

And one of those options is to push Scarborough as hard as possible, with or without ExxonMobil as a partner, and potentially as a rival to train five on the Shelf.