Off the coast of Western Australia’s Kimberley region, the usually tranquil waters of the north-eastern Indian Ocean can belie all sorts of things.

The stretch of sea between Australia and Indonesia is a corridor for some of the biggest storms that occasionally lash the face of the Earth.

In the north, running parallel with the vast Indonesian archipelago lies a tectonic fault line that is one of the most active in the world.

Besides these natural phenomena, the area is also home to some treacherous corporate eddies not readily visible from the surface.

One such undertow can be found about 450km north of Broome, where two of the world’s biggest oil and gas players are entwined in a rivalry that’s pitted them against the clock and each other.

It’s a high-stakes game, with huge amounts of hydrocarbons, billions of dollars, and reputations for commercial competence on the line.

Saul Kavonic, an oil and gas analyst with Credit Suisse, says the cause of tension is easy enough to identify.

He says both companies are tapping the same resource.

“Essentially, they’re sucking from the same milkshake,” Mr Kavonic says.

The companies in question are INPEX, the state-owned Japanese oil and gas firm, and Anglo-Dutch super-major Shell.

Notionally, the two behemoths are operating distinct projects that just happen to be side-by-side – INPEX, the $US45 billion ($66 billion) Ichthys and Shell, the $US17 billion Prelude floating liquefied natural gas (LNG) venture.

A race with only one winner

But Mr Kavonic says the reality is far messier than this.

In truth, he says the pair is engaged in a race from which there’s only likely to emerge one winner. 

And it almost certainly won’t be Shell.

“They both entered the race – quite knowingly entered the race – and Shell lost that race and lost part of their reservoir with it,” he says.

How two corporate titans came to be operating competing projects on what is effectively the same gas field is as much a story about corporate egos as it is about flawed strategies and technical execution gone wrong.

And it traces its origins back to Australia’s supposedly golden age of natural gas — a time when about $US200 billion ($291 billion) was splurged on LNG developments around the country.

Martin Wilkes, the managing director of Perth-based industry adviser RISC, says much of the money arguably didn’t need to be spent.

Mr Wilkes argues many of the companies involved – not to mention their shareholders – may have been better served to combine their projects with others nearby.

Instead, he says narrower interests often won out and at great cost.

“It’s not unusual, that type of approach,” Mr Wilkes says.

“But the history shows we’ve never been good at it. In fact, more often than not, it’s about competition.”

History behind the intrigue

To illustrate this point, Mr Wilkes wryly notes the naming practices that have often been used by oil and gas companies.

He cites WA’s Gorgon gas field as the classic example, which US giant Chevron developed last decade at a colossal cost of $US54 billion ($78 billion).

Shortly after its discovery in the early 1980s, he says the operators of the North West Shelf LNG plant made a big find of their own and called it Perseus.

“Now, the naming of the Perseus field is not by accident if you know your Greek mythology,” Mr Wilkes says.

The arguments get a sympathetic audience from Mr Kavonic, who laments Australia’s wasteful history of spending on LNG mega projects.

From North West WA to Queensland, where three LNG projects were built cheek-by-jowl on Curtis Island off Gladstone, Mr Kavonic reckons there has been a “complete overbuild of infrastructure”.

And he hints at the peculiarly human reasons for the profligacy, suggesting “individual and corporate personality drivers” may have taken precedence over common sense.

“Australia has got a terrible track record of duplicating effort, not realising synergies in its LNG infrastructure,” Mr Kavonic says.

“You’ve had certain individuals at certain companies with an adamant strategy at a point in time, particularly 10 to 15 years ago when we had the last boom, where they did things that most other industries wouldn’t do.”

For Mr Kavonic, the decisions by Shell and INPEX to plough ahead with their own projects at Prelude and Ichthys, respectively, was not even the worst example of this mentality.

But he says both companies should have known, courtesy of their geologists, that Prelude and Ichthys are interconnected fields.

Shell ‘thought it was faster’

As such, he says it should have made overwhelming sense for the companies to combine — or unitise — their projects to lower development costs and maximise returns.

But he says both companies were so intent on doing things their own way that such logic went out the window.

“Shell had originally targeted to start Prelude up before Ichthys was going to start,” Mr Kavonic says.

“But, due to the much-delayed start-up of Prelude, Ichthys started up first. And as a result, Ichthys has been sucking away Prelude’s reservoir.

“That’s an acute problem for Prelude because Prelude’s reservoir was quite small, to begin with.

“And now, because of their late start, they’ve lost part of the small amount they had across the boundary to Ichthys, which has sucked it away.”

While neither Shell nor INPEX would discuss the operational complexities of their projects, several industry sources suggest both companies tried to take the other’s gas.

However, both companies are believed to have concentrated much of their drilling efforts on parts of their permits butting up against the other’s boundaries.

In the case of Ichthys, this has reportedly involved the use of horizontal wells drilled directly along Prelude’s perimeter.

“If you look where the wells are, they put some of them on the boundary … with the intent it would draw from the neighbour’s reservoir the most,” Mr Kavonic says.

A disaster for floating LNG

According to Mr Kavonic, Prelude was supposed to spark a revolution in the gas industry by proving that floating LNG technology was superior to conventional plants built on land.

He says it may have been for this reason that Shell decided to risk so much money and reputation on a project despite the obvious geological warning signs.

But things have not gone to plan.

The lost gas at Prelude was only one of a number of woes affecting the project’s viability, albeit a major one, he says.

Originally budgeted at $US12 billion ($17 billion) in 2011, he says Prelude’s eventual cost has blown out several times, though Shell has never revealed the final figure.

On top of this, Mr Kavonic says Prelude — the world’s biggest floating structure — has been marred by technical problems and outages.

“Originally, it was meant to be, design one, build many with FLNGs,” Mr Kavonic says.

“And what ended up happening is they designed many and built one.”

Global energy consultancy Wood Mackenzie is more cautious in its assessment of how Prelude and Ichthys are faring.

Daniel Toleman, an LNG analyst at the firm, says Prelude seems to work reasonably well when it is operational.

However, Mr Toleman also acknowledges that production at the two fields is a zero-sum game.

He notes that Shell has pressed the button on developing the nearby Crux gas field at a cost of $2.5 billion to provide “back-fill” for Prelude from 2027.

Mr Toleman also notes that although Shell may be losing some of its reserves to INPEX, determining the amount of gas involved — and its value — would be difficult.

“I would caution that reservoir engineering in the sub-surface is more complicated … than what we would think,” he says.

“I think it’s not until next decade that we’ll know how much gas Prelude has lost.”

Cautionary tale for taxpayers

Mr Kavonic, for his part, suggests the numbers are likely to be big, suggesting billions of dollars worth of gas could be involved.

“The details of this have not been disclosed,” Mr Kavonic says.

“There is a margin of uncertainty around what they would be.

“To the point that it could have hastened Prelude’s life by at least a year.”

In response to a request for comment, a spokeswoman for INPEX says the company did not comment on commercial matters.

Shell also declined to be drawn.

Amid enduring grievances about how much — or how little —  tax LNG producers pay on the resources they exploit, both Mr Wilkes and Mr Kavonic reckon the situation should stand as a cautionary tale.

They note that Australia’s signature tax on oil and gas production — the Petroleum Resource Rent Tax — is based on profits.

But Mr Kavonic says it’s doubtful that Prelude, in particular, will ever pay the tax because it’s unlikely to get its up-front costs back and become profitable.

“The reason everyone is upset the PRRT is not realising as much as they hoped is because it’s a super profits-based tax,” Mr Kavonic says.

“And some of the projects are never going to be super profitable,” he says.