UPDATE: Arrow Buys Entire Fisherman's Landing LNG Project
February 10 2010 - 9:09PM
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 coal seam gas acreage to Royal Dutch Shell PLC
in 2008 but has been rapidly proving up its 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.
This seems quite optimistic compared to analysts expectations,
with Merrill Lynch recently estimating a two-train project could
cost about A$5 billion to build.
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 on the project
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 more for each
extra train.
Milestone payments comprise A$24 million when Arrow makes a
final investment decision on the first train, expected March 31,
A$24 million when the project produces its first 1 million tons
year of LNG, expected in 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
options 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,
adjustable if the project's costs are higher or lower than
expected, 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".
Arrow's deal with LNG Ltd. is subject to completion of
confirmatory due diligence and LNG Ltd. gaining shareholder
approval.
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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