Woodside fold, BHP Billiton raise - by going ‘All in’

In part one of the ‘game’ we hypothesised about the true potential for Australian companies to supply LNG into California via the medium of building offshore LNG receiving terminals. We used the analogy of a game of poker and suggested that both Woodside and BHP Billiton had entered the big boys table and were sitting with less than desirable cards. Raise, hold or fold were the options. Six months down the track and the calls are being made with Woodside folding whilst BHP Billiton appears to have gone ‘all in’ with their Cabrillo Deepwater proposal. Where to from here leading up to the showdown?

Activity at the table has been brisk of late with some serious calls being made. As predicted by the cards, the early demise of the Woodside/Crystal Energy ‘arrangement’ was subtly announced a short while ago. Couched in the usual corporate ‘we’re not dead yet – we’re building our own facility’ spin, underscores the fact that the ‘Platform Grace’ proposal is a dog. The facility should now be allowed to ‘rot in peace’ in its original ‘rig to reef’ legacy.

The game has been developing steadily with most of the ‘noise’ and moves coming at the ‘junior’ end of the table, whilst the high rollers sit quietly, monitoring the scene, shuffling their cards. With the field narrowing and the introduction of jokers and wildcards to the play, the heat is now starting to fall on the Mitsubishi Long Beach onshore terminal. The vitality of the original hands are called in to question at this stage of the game with the jokers and wildcards being introduced strategically to directly influence the short term outcome.

The cards suggested a long drawn out process on approval for the Long Beach proposal and with the ‘siting of LNG plants in populated areas’ wildcard and ‘Arnie on safety’ joker now in play, the prognosis is not looking good.

‘All in’

The real action concerns the BHP Billiton proposal.

Armed with a full suite of joker cards, BHPB have raised the stakes by going ‘all in’ on Port Cabrillo and it’s an impressive hand. However, there are damaging wildcards out there like the US Geol Survey earthquake report uncovered in part 1 of ‘the game’. The discovery of that document is seemingly driving much of the current activity and certainly negated the Woodside ‘arrangement’ with Crystal Energy.

In this instalment, we examine the cards both for and against BHPB in the context of a call being made to either exit or have a win to stay in the game. Depending on which way you look at an early call, it could be perceived as a good or a bad thing. LNG is a big game yet only part of much bigger geopolitical struggle in a world that has discovered Peak Oil. North American gas supplies are on the wane whilst demand is forecast to increase dramatically over the next 10 years. Having security of tenure in the California gas market is bankable revenue going forward but this is prime real estate and as opposition to the proposed Chinese takeover of Unocal has shown, this is an emotive subject.

The play

By progressively issuing jokers to the play, BHPB have upped the ante for an early call and a piece of the action.
First we had the ‘John Howard and Australian Federal government batting for us’ joker which certainly raised the profile of the project. Then recently a protocol breach with the big cheese of California joker ‘Arnie prefers Cabrillo pinch hit’.

It’s an impressive line-up if you’re a Fox News type, but the wildcards they miss are often crucial to the outcome. It’s a high risk strategy because when you go ‘all in’ you either get your win or you are ‘gutted’ and have to leave the game.

Wildcards

The most important document of the approval process is the EIS/EIR currently being compiled - but serious errors have surfaced in the original draft proposal. On the technical side it was conceded by Cy Oggins, state project manager of the California State Lands Commission who are directing preparation of the process (along with the US coast guard), that the draft EIS/EIR was now being re-evaluated. This specifically followed the emergence of the earthquake report from the Geol Survey which everyone apparently missed, ("We feel that we had addressed the technical information in that (USGS) document, but now we are re-evaluating that. We now have a copy of that report and we are revising the draft [EIR]," he said in a telephone interview.*
Now it has recently been reported, there are serious deficiencies around pro-Cabrillo Port public comments, specifically quoted in the draft proposal – but subsequently found to be bogus. The project’s opponents have been all over this information and are starting to question the political aspects of the project on top of the technical, commercial, environmental and safety aspects.

By far the most critical wildcard is the technical issue as this affects all cards in play. Technical breakthroughs in a game as big as the LNG business are only brought into play by the high rollers and none of them has so far been able to crack the offshore LNG terminal problem from a technical perspective. Things move a lot out there!

The Port Cabrillo proposal is BHPB’s second attempt at getting an offshore LNG proposal up and running. In 1998 BHP Petroleum fell out with partner Phillips Petroleum over operatorship and development strategy for the Bayu/Undan gas/condensate field in the Timor Sea off the northern coast of Australia. Phillips basically refused to entertain the BHPP development proposal whatsoever – and won. Now we’re looking at a massively upgraded version of the original pilot and in a massive 900 + metre water depth to boot!

The one thing you got to have if you want to take these technological ‘leaps of faith’ in dangerous and unproven technology is some ‘street cred’. Opponents of the Port Cabrillo proposal have the right to examine prior performance under similar situations or criteria. From an environmental point of view, ‘OK Tedi’ might be a point of reference – no brownie points awarded there I’m afraid.
Safety, fares even worse.
Less than ten years ago the Australian Federal government went to the unusual step of bringing in the head of the UK Health & Safety Executive (HSE), Dr. Tony Barrell to “Review the management of safety at BHP Petroleum”.** This arose from the revelations of a whistleblower who worked on large offshore structures (FPSO’s) for BHPP. He cited dangerous ‘incidents’ and ‘procedures’ that could potentially have led to disaster. No friendly phone call here to be told to ‘clean up the act’, this was a full blown Ministerial level shakedown from the guy who implemented the default offshore safety rules put in place worldwide after the 1988 Piper Alpha disaster in the North Sea. Further, Barrell adjudicated that the company’s safety performance had been ‘inadequate’.*** Barrell’s report was tabled in parliament in mid June 1996, just before the annual APPEA Conference in Darwin. I’m sure there will still be a few copies lying about somewhere for those who would like a peek.

The introduction of these wildcards doesn’t inspire confidence.

Other wildcards just as serious for BHPB are waiting in the wings. It would take a leap of faith not to expect people along the California coastline to inquire what indemnities are in place should the proposal proceed. Who is going to provide indemnities and who is underwriting. Big leaps in technology cost big and how do you indemnify a place like southern California against unknown and unproven technology juxtaposed against a history of proven inadequate safety performance? This is National Security territory. Why go to all that trouble when you have the high rollers sitting quietly, cards close to their chests, one whistling, one humming, “South of the border”. How many terminals are you going to need, anyway?

Part of the impetus for Port Cabrillo is development of the Scarborough gas field off the coast of Western Australia. But the proposed supply has run into problems. BHPB’s partner Exxon is none too keen on developing Scarborough and why would they – they are safely nestled in the proposed Gorgon gas project, also off the coast of Western Australia. The logistics lend support to the Exxon case. The Scarborough field is in 1000metres of water and a long way offshore and would be an expensive development. Why duplicate the risk when you think you are already sitting with the winning hand.

Politics

Ultimately, big politics will determine risk, reward and outcome. One could legitimately surmise that with all the attendant hassles, the reward profile for the US with Port Cabrillo does not match the risk profile, particularly as supply looks assured from other sources. However, the Gorgon project hasn’t been given final approval yet either.

It’s a complex situation, building up to a tense and nervous showdown – pure Hollywood. BHPB are hoping for a box office blockbuster but they may be disappointed, with ‘B’ movies or even grubby porn being a far more likely outcome from this town. We’ll know for sure if we see Arnie ducking for cover whilst exclaiming ‘Hasta La Vista Port Cabrillo’, sometime further down the track.

References
* Hans Laetz/Malibu Times
** Interview with Tony Barrell, Australasian Oil & Gas News, June 1996
*** An independent review has found BHP Petroleum’s (BHPP) past safety performance to have been inadequate. The report was released today (June 18, 1996, ref: DPIE96/28P) by the Federal Resources Minister, Senator Warwick Parer, the NT Minister, Mike Reed and the WA Mines Minister Kevin Minson. The comprehensive review, headed by Dr. Tony Barrell, former Chief Executive of the Offshore Safety Division of the United Kingdom Health & Safety Executive, was commissioned on 3 April 1996. The review also investigated allegations by a BHPP employee, Mr Tim Visscher, of incidents involving safety on the company’s offshore petroleum facilities.