Arrow Energy, the Australian coalseam gas joint venture between Shell and PetroChina, began slashing its workforce by the hundreds last week, according to sources familiar with the matter. The cuts come amid speculation that Shell and PetroChina will dump Arrow’s proposed $20 billion liquefied natural gas (LNG) project on Curtis Island in Gladstone.

UGCenter.com previously reported that up to 600 staff members could be laid off. Later, one of those dismissed said 250 people were let go Jan. 20, with another 250 expected by the end of last week. According to the Sydney Morning Herald, Arrow confirmed it has carried out “a review of staffing levels as it manages costs” and it “remains focused on finding additional value and reducing overall costs.”

As previously reported by UGCenter.com, the company threw in the towel months ago, according to one internal source who spoke on condition of anonymity. “The 2014 exploration budget has been reduced from $250 million to $30 million. So you already know the project is dead in the water,” he said.

The project is one of the first casualties of Royal Dutch Shell’s New Year’s resolution to get its house in order. After a sharp fall in profits, Shell’s top brass said that the oil giant is reducing costs and offloading up to $US30 billion of assets this year. Shell’s $US7.4 billion stake in Australia’s Woodside Petroleum is also on the chopping block.

Dark clouds had been gathering over the Arrow LNG project for some time. Amid falling gas prices and rising construction and labor costs, a final investment decision on the project was pushed back from the start of 2013 until the end of 2013 before being postponed until 2014.

When Ben van Beurden was announced as Royal Dutch Shell’s new chief executive in July, he warned that the company’s sharpened pencils would sink a few projects. “We will need to make some harder choices over the next few quarters between the best new investment opportunities from this emerging portfolio,” he said.

In October at Shell’s quarterly results presentation there was little sunshine. “This is as much about what we choose not to do as what we choose to do,” said Shell chief financial officer Simon Henry.

The rumored decision to withdraw from the Arrow LNG project comes at a significant cost. Shell and PetroChina paid more than $AU4 billion to acquire coalseam gas acreage in Queensland’s Surat and Bowen basins and spent up to another $AU5 billion developing the ground, pipelines and LNG project.

The first cracks appeared soon after Shell and PetroChina’s $AU3.5 billion takeover of the publicly listed Arrow in 2010. Fears were immediately raised that Arrow’s coal seam gas reserves would not support an initial production target of up to 8 million tons of LNG a year. To ease concerns, the joint venture forked out another $AU550 million a year later to buy Bow Energy, a coalseam gas producer spun out of Arrow in 2005. The price paid represented a 72% premium on the company’s stock market valuation. Arrow was also required to take all Bow staff and pay them a 4% pay raise.

Arrow has only two Bow tenements in the Bowen Basin left to show from the transaction after relinquishing Bow’s assets in the Surat Basin. The $AU30 million coalseam gas-fired Blackwater Power Station, which was part of the deal, was disposed of last year for about 30% of the cost it took to build it.

Apart from gas supply issues, the greatest challenge for Arrow was winning the hearts of stakeholders. The company faced stronger headwinds than its competitors because a large percentage of its Surat Basin resources are beneath world class farm lands.

Despite pioneering a number of innovations such as multi-pad well sites and treating waste water for irrigation, Arrow lost ground to farmers in the battle for land access.

Arrow’s most abundant gas resources lie under the fertile pastures of Cecil Plains, just west of Brisbane in the Surat Basin, but all 100 to 150 landowners in the area have locked their gates on the company, according to advocacy group Lock the Gate Alliance.

“Cecil Plains is the most fertile and productive land in the country. There’s not a worse place in the whole of Australia to put a gas field. To do so would be just stupid. The farmers cannot see any benefit whatsoever in allowing coal seam gas into the region,” said Drew Hutton, president of the Alliance.

As Arrow faced clenched fists in the paddock the company confronted crossed arms in parliament, according to a government insider.

“If Arrow had shared stronger relationships with government they could have got started on the LNG project before costs started creeping up,” he said. “The government does not like Arrow and never has. Chief executive Andrew Faulkner made it worse. He had never worked in Australia and does not understand Australian politics. And the people appointed to his frontline are not well liked by the people in parliament. Everything Arrow asked for fell on deaf ears.”

Shell will be reluctant to stake a “for sale” sign on its Arrow ground in the current market. With limited bargaining power and few buyers, the company could expect to recoup as little as a tenth of their $AU4 billion plus property outlay. Foreign Investment Review Board rules prevent PetroChina from swallowing Shell’s share.

It is expected that Arrow will treat its gas through one of the three separate LNG projects currently being built on Curtis Island or sell its gas to Australia’s east coast market. Either way, another staff cull could be in the cards before June. This would reduce the headcount to pre-takeover level.