ConocoPhillips (NYSE: COP) today announced the sanction of development of a second 4.5 million tonnes per annum (MTPA) production train for its Australia Pacific LNG coal seam gas (CSG) to liquefied natural gas (LNG) project in Queensland, Australia.

“This announcement marks another important milestone for the Australia Pacific LNG project and ConocoPhillips,” said Ryan Lance, chairman and chief executive officer. “Sanctioning of the second train is the final step in the approval process for the project. From this point we are committed to the development and construction of all infrastructure and facilities to ensure the first delivery of LNG in 2015.”

LNG exports from the second train are scheduled to commence in early 2016 under binding sales agreements to Sinopec Corp. and Kansai Electric Power Company (Kansai Electric).

“The Australia Pacific LNG project is on schedule, and is strategically positioned to commercialize its superior CSG reserve position and satisfy Asia’s rapidly growing demand for reliable, cleaner-burning energy,” Lance said. “The approval of Sinopec Corp.’s additional subscription is testament to the strong growth market in China and the importance of Sinopec Corp. as a key partner. We look forward to further developing our relationship over the next 20 years.”

Sanction of the second LNG train includes the further development of related upstream gas gathering and processing infrastructure as well as the construction of the second production train by Bechtel.

As previously announced, the estimated gross capital cost associated with the second train is US$6 billion, with a total two train project cost of US$20 billion. The majority of the scope will be executed under pre-agreed options to extend existing contracts related to the first LNG train, including the Bechtel International, Inc. and Bechtel Australia Proprietary Limited contract for facilities on Curtis Island.

Following the start up of the second train, the project has an anticipated peak production net to ConocoPhillips of 100,000-105,000 barrels of oil equivalent (BOE) per day. This long-term project has returns that are competitive with other LNG projects and will provide long-term production and cash flow to ConocoPhillips’ portfolio, contributing to the company’s plans to deliver 3 to 5 percent annual production growth and 3 to 5 percent annual margin improvement.

In April 2011, Australia Pacific LNG and Sinopec Corp. signed a sales agreement for 4.3 MTPA of LNG for 20 years from mid-2015 and a Subscription Agreement in which Sinopec Corp. subscribed for a 15 percent equity interest in Australia Pacific LNG. The first train of the project was sanctioned in July 2011, followed by the signing of a binding agreement with Kansai Electric in November 2011 for the sale and purchase of approximately 1 MTPA of LNG for 20 years from 2016. An amendment of the existing sales agreement with Sinopec Corp. was signed in January 2012 increasing their LNG purchase to 7.6 MTPA.

With sanction of the second train, the agreement for Sinopec Corp. to subscribe to an increased equity interest in the Australia Pacific LNG joint venture is now unconditional with completion due to occur shortly. Sinopec Corp.’s ownership interest will increase from 15 percent to 25 percent, with ConocoPhillips’ and Origin Energy’s ownership interest each being reduced from 42.5 percent to 37.5 percent. Sinopec Corp.’s additional equity subscription provides Australia Pacific LNG with a net payment of US$1.4 billion for value determined as at Jan. 1, 2011. That amount is then adjusted for Sinopec Corp.’s ownership interest share of capital expenditure since that date. Therefore, Sinopec Corp. will inject an estimated US$2.1 billion into Australia Pacific LNG. These funds will be used to meet project expenditure before any additional funding is required from ConocoPhillips, Origin Energy or Sinopec Corp.

Origin Energy and ConocoPhillips previously agreed, subject to certain milestones, that final investment decision payments on the first two trains of the project will be deferred until ConocoPhillips achieves an agreed cash rate of return on its project investment, including acquisition cost. In accordance with that agreement, this project sanction defers ConocoPhillips' final investment decision payment of US$500 million for the second train of the project.

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