High-cost Australia May Miss LNG Expansion

Thursday, April 10, 2014

Stung by soaring costs, the gas industry paints a gloomy outlook for new liquefied natural gas (LNG) projects in Australia, putting at risk $180 billion of developments from 2018 onwards.

While Australia enjoys political stability and is close to Asian customers, big cost overruns at a series of giant offshore projects have dismayed companies like Chevron, ExxonMobil Corp and France's Total SA.

"This wage growth is what is currently crippling Australian industry and is simply not sustainable," Chevron Australia Managing Director Roy Krzywosinski said to a chorus of approval at the Australian Petroleum Production and Exploration Association (APPEA) conference this week.

Nearly $200 billion worth of gas projects are nearing completion with seven LNG projects due to start exporting gas between late 2014 and 2017, set to push Australia ahead of Qatar as the world's largest LNG producer.

All eyes now are on whether another $180 billion worth of potential new or expanded projects will be developed next, or whether money will flow instead to LNG projects in North America, east Africa and elsewhere.

"In Australia there is plenty of gas. Business conditions in Australia are pretty good. The main problem in Australia is cost," Jean-Marie Guillermou, Asia Pacific chief for Total Exploration and Production, told Reuters.

Costs have shot up over the past few years as energy companies and iron ore and coal miners, which are all building multibillion dollar projects at the same time, have competed for local equipment and a limited pool of workers.

Under workplace laws set by the previous Labor government, companies had to negotiate "greenfield agreements" with unions before work could start on any new projects. The law set no time limits for negotiating those agreements, so unions were in a strong position to drag out talks and call the shots.

If companies resisted their demands, unions could delay the start of work on LNG projects, delays that companies could not afford in the race to be first to market, Australian Mines and Metals Association spokesman Tom Reid said.

As a result, they won conditions that industry executives and Australia's conservative government say are enjoyed by no other workers around the globe. An industry study pointed to cooks and laundry hands earning up to A$350,000 a year installing rigs and pipelines.

Chevron Krzywosinski said costs on the $54 billion Gorgon LNG project, Australia's biggest resources project, were about 40 percent higher than in the United States.

For Chevron, negotiating costs down will be key to whether it decides to expand Gorgon, one of several expansions of existing projects - so-called brownfield developments - that Australia needs in order to boost growth.

Unions are not relenting. The Maritime Union of Australia (MUA) is battling Chevron and its contractor Tidewater Inc , arguing that maritime workers make up just 1 percent of the cost of building a project like Gorgon.

"We make no apology for trying to get a good deal for our members, who are the ones who spend weeks at a time working away from home in very tough conditions," Chris Cain, Western Australia branch secretary of the MUA, told Reuters in an email.

"It's really difficult to take costs out," said Mike Lynn, oil and gas leader at consultants Deloitte. "That's going to be slow, painful and combative with unions."

With supply competition likely from the U.S. shale gas boom, as well as Canada, Mozambique and Tanzania expected over the long run, LNG pricing is also likely to come under pressure, which would further squeeze margins on Australian projects.

"How much you're selling it for is also moving against Australia," said Paul Griffin, an energy partner at law firm Allen & Overy.

Australian Industry Minister Ian Macfarlane said this week he saw little chance of any new project extensions.

"I'm starting to wonder if there will be a brownfield (project) in the next 10 years," he told reporters.

Changes Afoot
But not all the signs are bad.

Australia's ample LNG supplies, planned changes to workplace laws and the prospect of cheaper financing may still make new projects viable, say industry analysts.

Union power will be blunted if the conservative Liberal government is successful in amending workplace laws to set time limits on negotiation of greenfield agreements and curb provisions on when a union can enter a workplace.

That legislation has been passed by Australia's lower house of parliament and is awaiting approval in the upper house Senate. In July, the makeup of the Senate will change in favour of the government, at least on workplace issues.

Companies are also leaning toward cheaper floating LNG projects offshore for new projects. Floating plants don't need pipelines to shore, so require fewer construction workers.

Industry executives and government officials see floating LNG as the best option for the Browse project, being studied by Woodside Petroleum ; the Scarborough project, led by ExxonMobil; and the Bonaparte project, led by GDf Suez.

The Browse partners expect to save 20 to 30 percent of the estimated $45 billion project cost by using floating LNG.

Funding is likely to be cheaper, as Australian banks are facing a slowdown in credit growth and are offering cheaper rates on debt, said Kevin Jamieson, director of natural resources at National Australia Bank.

"Banks are desperately looking for quality new deals," he said, adding that Asian demand was likely to be strong as China turned to gas to combat pollution. Chinese and Japanese utilities preferred to lock in gas from Australia rather than east Africa because of its lower geopolitical risk.

World demand for LNG is forecast to reach 470 million tonnes in 2030, according to APPEA, implying more than 200 million tonnes of new LNG capacity will be needed. Australia is expected to be exporting nearly 85 million tonnes a year by 2018.

APPEA said projects making up more than double that 200 million tonnes are under consideration globally.

(Reporting by Sonali Paul; Editing by Richard Pullin)

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