Shell Grapples With Extended Strike at Prelude

No quick resolution is expected for a protected industrial action at Shell’s 3.6 million ton per year Prelude floating LNG facility off Western Australia, the world’s largest. The unions have extended the strike once more to Sep. 1 from its Jun. 10 start and production has been suspended at the facility since last month. Shell’s application to Australia’s workplace tribunal Fair Work Commission (FWC) to suspend the strike and impose a “cooling period” was also rejected.

Shell must now delay a major maintenance program originally due in September-November to July 2023 at the earliest. The major has had to procure replacement cargoes to meet its contractual obligations to its Asian buyers, propping up Asian spot LNG prices. Shell expects its LNG output to be 6.9 million-7.5 million tons in the third quarter, down from 7.66 million tons in the second quarter and 8 million tons in the first quarter. Prelude typically exports four cargoes each month.

The FWC has helped reduce the union’s outstanding bargaining claims. But one key issue remains: Shell has not agreed to a job security provision preventing it from outsourcing operational jobs under their direct hire to subcontractors where their negotiated conditions may not apply. The unions are using a recent enterprise agreement for 2022-26 reached with Inpex, the operator of Ichthys project, as a benchmark in their negotiations with Shell. The Inpex agreement incorporated new job security provisions, a six-year extension to at least 2030 for fly-in-fly-out interstate workers to continue working for Inpex, more rest days and higher pay.

A local industry observer tells Energy Intelligence that the strike is “highly strategic” as the unions waited until Prelude’s operations ran smoothly after being shut between December and April due to a power loss, as well as waiting for the project sanction of the backfill 1.6 trillion cubic foot Crux field in May. The industrial action also coincided with Shell’s second-quarter results showing a doubling in profits, with generous bonuses for its global workforce. “Under Australian labor law, this kind of dispute can persist for an unhealthy length of time,” according to energy analytics firm Vortexa’s head of LNG, Felix Booth. He expects Prelude production to continue at low levels for the next 12 months due to the strike and mechanical reliability issues.

Shell Unwilling to Yield

Shell has refused to negotiate with the unions until the industrial action is lifted. Meeting the union’s demands would increase the facility’s costs by $40 million annually, it says. Prelude has already been grappling with cost overruns, start-up delays and safety issues since it was sanctioned in 2011 and subsequent operational issues since starting up in 2019. Reserves at the 3 Tcf Prelude field seems to be depleting faster than expected, hence the need to sanction Crux as backfill. But market observers say those figures are nothing compared to current spot LNG prices. Considering that Shell may have missed the delivery of five to six cargoes as part of its Prelude contractual agreements since the strike started, this means it could have paid as much as $760 million for six spot cargoes assuming a $40 per million Btu price. The major has continued to be active in bidding for spot cargoes for October delivery now priced at $50/MMBtu.

The implications of setting a precedent for other enterprise agreements given Shell’s heavy presence in Australia could weigh on the major’s position. “Whatever Prelude agrees will be the floor price going forward. It will impact other projects like Gorgon, North West Shelf, Browse and Queensland Curtis LNG in which Shell holds stakes,” the local industry observer says. On the other hand, the aggressiveness of Australian unions may also prolong negotiations. The Offshore Alliance, which groups the Australian Workers’ Union and the Maritime Union of Australia, is expected to resume negotiations with operators of other west Australian LNG facilities. Unions have become quite militant and successful in ensuring that oil and gas operators meet their demands, the local industry observer says. He cited as an example how the unions asked for $100 iTunes cards for each flight for Gorgon’s fly-in-fly-out workers. “The unions went after the operators with the shortest drilling campaigns,” he says. “You’d assume someone with a few weeks left on a contact won’t fight as hard — but anything they concede is the benchmark for the next guy with years on their rig contract.”