Browse planets align for Woodside

It is quarter of a century since then-Federal Treasurer Paul Keating declared "this is a recession that Australia had to have".

Today much of WA feels like it is, or about to be, gripped by a recession we had to have after milking the biggest resources-fuelled boom arguably since the post-WWII recovery.

It is music to Peter Coleman's ears.

Add a suddenly soft oil price to the cocktail made up of weaker minerals prices and the looming end of WA's $140 billion resources construction boom, and the Woodside Petroleum boss reckons business, and industry cost bases in general, are heading back to terra firma.

As he pointed out to 100 fund managers and analysts in Melbourne on Thursday, the broader market downturn had enabled Woodside to cut its spending last year on so-called maintain-repair-operate activities by 33 per cent to $210 million.

It is a small part of Woodside's cost base but a good indicator of the trend. This year's MRO bill should be even lower considering the subsequent falls in the oil price and accompanying sector activity.

Hendrik Snyman, who this year took up the newly created role of Woodside senior vice president spend reduction initiative, said the MRO cost-cutting success included cutting 80 valve suppliers to just one, to slash valve spending by 40 per cent to $50 million.

Four years into his tenure as Woodside managing director, Mr Coleman spent the week, first at the APPEA conference in Melbourne followed by the investor day, talking of drill rig and vessel rates that have fallen by up to 40 per cent, services companies begrudingly accepting big hair cuts to remain in the game, and significant reductions in staff and in-house contract numbers to accompany a massive efficiency and simplification drive.

The cost paradigm has changed, and he laughs when asked whether Woodside's next hope, the Browse project, would be less expensive than the raft of Australian LNG projects (including Woodside's Pluto, Chevron's Gorgon and Wheatstone and Inpex's Ichthys) that have or are being been built over the past seven years.

"Absolutely, that is a pretty low bar," Mr Coleman said.

"They are at the top end of the cost curve, Browse is quite a way down and what we are trying to do is bring Browse down even further because at the end of the day, the reservoir will deliver what it delivers, the (oil/gas) price will be what the price is, so the only thing you control is how much you spend."

Not saddled with a capital intensive, cash-draining development project over the past two years, unlike almost all his LNG peers in Australia, Mr Coleman has emerged as a countercyclical investor, as demonstrated by the $US3.75 billion acquisition of Apache's stakes in the Wheatstone and Kitimat LNG and Balnaves oil projects. It gave Woodside stakes in two LNG projects for less than their previous owner spent on them.

But the big prize remains Browse.

Woodside says it is champing at the bit to push the button on the Browse LNG development, based on Browse Basin fields Torosa (discovered 1971), Brecknock (1979) and Calliance (2000). Combined, the fields 425km north of Broome contain 15.4 trillion cubic feet of gas and 453 million barrels.

The world-class nature of the resource had never been in doubt but costs associated with various development options have proved the nemesis.

The abandoned 12 million tonne a year James Price Point development option was mooted to come with a life-of-project budget of $80 billion. Even in today's low interest-rate environment, it would struggle to provide an acceptable return.

Mr Coleman's language has changed substantially over the past few years, in line with Browse's new strategy of a staged field development starting with one or maybe two floating LNG vessels over Brecknock or Calliance before attention shifts to Torosa.

Woodside is yet to flag Browse's likely start-up cost but analysts say it could be less than $20 billion, using Royal Dutch Shell's $US13 billion one-vessel Prelude FLNG project as a guide.

Gone are Mr Coleman's repeat references of how expensive operating and construction costs are.

As he starts seeing and revealing the spoils of Woodside's all-areas cost drive initiated at least two years ago (long before oil crashed) that has seen staff numbers cut by 600, to 3500 in the past year alone, and third-party contractor numbers slashed from 295 to 88, Mr Coleman is also seeing the external environment change substantially, and further in his favour.

His Browse pitch is all of sudden gaining traction in gas marketing circles too because 2021, the year Woodside and many analysts expect global LNG supply to be in deficit, is on the horizon.

Given the tough macro-economic environment, few if any new LNG projects are expected to be sanctioned in Australasia, which makes 2021 Browse's window, says Woodside as it reveals a five-year construction period.

The favourable marketing outlook combines with Woodside's now lower internal costs, a suite of operations spinning of cash and a strong balance sheet, even after the Apache deal and Wheatstone's ongoing capital expenditure bills.

Contractors, from service providers to drillers to ship yard owners, are starting to wonder where their next job in the Australasia region will be.

A huge chunk of Browse's development cost will be subsea work such as wells and flowlines, were rates are apparently falling sharply.

"It's a good business environment for those who have good strong cash flow and those who can invest in this environment, " Mr Coleman said.

"The balance sheet is now in a very strong state and we have been ahead of the curve in getting our cost base down."

And, Mr Coleman says, alignment with the Browse joint venture partners particularly Shell and BP is as good as it has ever been.

The fact more than half of Torosa, the biggest of the three Browse fields, lies in WA waters has made the State a sudden important venture partner and, says Mr Coleman, has helped align interests with the Barnett Government as well.

But all this bullish talk from Browse operator Woodside has failed to quell industry chatter that its two European super-major partners are not as excited as Mr Coleman on pushing the final investment decision (FID) button by late next year.

BP continues to rebuild itself and is about to embark on a billion-dollar exploration campaign in the Great Australian Bight. Shell has its hands full with the about GBP47 billion takeover of LNG specialist BG Group.

As one industry source pondered, was Woodside talking up Browse so in the event the joint venture blocked or again deferred construction it, as the sole Australian consortium member, could remain on the high horse?

For all the talk of unity, oil and gas remains an industry of huge corporate egos and bragging rights.

Woodside is close to finalising all necessary agreements and conditions before it, as operator, invites the Browse consortium to commit to front end engineering and design work. FEED is no minor expense but, more tellingly, is usually seen as a precursor to a positive FID.

Mr Coleman was asked this week how confident he was that the other Browse partners shared his enthusiam and would agree to enter the FEED gate by his target of the middle of this year.

"We wouldn't put that recommendation (to start FEED) to the joint venture if we didn't expect that the joint venture was aligned with it," he said.

Time will tell whether this could be Browse's year.

But it would be a good outcome during this economic downturn that WA had to have.