World's second biggest oil and gas project given £22bn go-ahead

Australia's Gorgon field to start producing LNG in 2014

Shell, Chevron and Exxon are to spend A$43bn (£22bn) building the world's second-largest oil and gas installation off western Australia.

The Gorgon gas project will tap reserves estimated at 6.7 billion barrels of oil equivalent. It includes platforms installed in water 1,300 metres deep, two subsea pipelines with a combined length of 240 kilometres, and a liquefied natural gas (LNG) facility on Barrow Island capable of producing 15 million tonnes per year.

The final investment case has been a long time coming, partly because of Gorgon's immense scale and also because of environmental issues at Barrow Island, including the impact on the endangered flatback turtle population. The plan was only cleared by the Australian authorities in return for stringent environmental conditions.

Alongside the three LNG "trains" at Barrow Island, the Gorgon project will also see construction of the world's largest carbon dioxide injection system. Once up and running, the CO2 released along with the natural gas will be pumped into a store more than 2 kilometres under the island.

Gorgon is scheduled to start producing gas in 2014 and will be the focus of the region's rapidly expanding LNG market. All three of the field's owners have already sold a large chunk of its future output. Last week, Chevron announced multi-decade deals with Japan's Tokyo Gas and Osaka Gas, and with South Korea's GS Caltex. Exxon has similarly-sized contracts with PetroChina and India's Petronet. And Shell signed a deal with PetroChina as long ago as last November.

Jon Chadwick, from Shell Australia's upstream business, said: "Gorgon will provide important supplies of energy to the fast-growing economies of Asia-Pacific."

Ballooning LNG supply is a key factor in a slump that has seen wholesale gas prices drop to a two-year low in the UK and a seven-year low in the US this year. Recession depressed demand in Asia, freeing up LNG cargoes just as a glut of new capacity came on stream in Qatar. In the UK, the situation was exacerbated by the opening of three new LNG terminals in the last 12 months.

But surplus conditions are not expected to last, Malcolm Graham-Wood, a director at Hansonwesthouse, said. "There is a very short-term oversupply but that will unwind itself quite quickly," he said. "That is why China, Japan and Korea are buying long term and getting quite a good price."

Huge as the plans for Gorgon are, the investment phase announced yesterday is likely to be just the beginning. "Gorgon will end up bigger still because there are other fields which aren't economic until you can pump them through Gorgon," Mr Graham-Wood said.

Shell already has 18.5 million tonnes per annum of LNG in operation. Gorgon adds another 3.75 million tonnes to its "under construction" portfolio, taking it to 7.4 million tonnes.

Chevron is Gorgon's operator and owns 50 per cent of the project. Shell and Exxon own 25 per cent each.