Australian LNG investment is at risk, but not as much as feared

Joseph Keefe
Tuesday, April 08, 2014

The Australian oil and gas industry is telling everybody that a second wave of investment in liquefied natural gas (LNG) plants is at risk unless labour and regulatory costs are cut.

The companies are unlikely to get all that they want. In fact they may not get very much at all out of the labour unions and the federal and state governments.

But it may not matter that much, because even with its high costs Australia remains one of the best places to invest the billions of dollars needed to develop a large-scale LNG project.

Australia currently has seven LNG plants under construction. When all are completed by 2018 the nation will be the largest exporter of the super-cooled fuel, overtaking Qatar.

Australia's three operating LNG projects produce about 24.2 million tonnes of LNG, with the seven developments being built slated to boost that by another 61.8 million tonnes.

The problem for the oil and gas companies spending some $192 billion on the seven plants is that costs have increased well beyond the initial budgets, while the certainty over LNG demand and pricing has eroded somewhat.

That's not to say that current LNG projects won't have buyers for their fuel, as the bulk of the planned output is already contracted.

However, there are still projects with a total capacity of 31.5 million tonnes which are awaiting final investment decisions, and another potential 65.8 million tonnes of expansions under consideration.

It is this second wave of investment that the industry is warning is at risk.

Chevron, which is developing the $54 billion Gorgon and $29 billion Wheatstone projects off Western Australia, is one of the companies leading the fight against high costs.

Roy Krzywosinski, managing director of Chevron's Australian unit, told the Australian Petroleum Production and Exploration Association conference here on Tuesday that the "window of opportunity to turn things around isn't a couple of years anymore, the clock is ticking."

The heart of the issue is the high labor costs and union militancy that have driven up project costs, with Krzywosinski saying Chevron has suffered more than 1,000 "disruptive" right of access claims by unions since 2009.

Chevron, in a theme echoed by other companies building projects in Australia, wants the government to amend labour legislation to limit the rights of unions and allow for more flexible work contracts, as well as making it easier to import workers from overseas.

The companies also want lower regulatory burdens and more certainty on taxes, which have been subject to change as federal and state governments switch between the two major parties.

With the conservative Liberal Party now controlling the federal government, and every state bar South Australia, it seems a good opportunity to overturn the workplace legislation put in place by the former Labor Party administration.

But Liberal Prime Minister Tony Abbott will be well aware tht making the workplace less regulated, removing worker protections and trying to restrict unions played a big role in the defeat of John Howard's Liberal government in 2007.

It seems more likely that some flexibility will be re-introduced in labour laws, but the best thing the industry can hope for from government is a lessening of red and green tape, and the scrapping of the carbon tax.

Union successes in gaining wage increases may also be over. The days where a cook can earn more than $300,000 a ear working on an offshore facility are likely to come to an end.

Wages were driven to among the highest in the world by the fact that building seven major projects simultaneously overwhelmed the available supply of suitable workers.

But this will fade over the next few years, and resource companies are likely to become much more aggressive in negotiating contracts.

However, it's unlikely that wages will fall dramatically, leaving Australia as an expensive place to do business, with construction costs believed to be some 40 percent higher than at equivalent LNG projects in the United States.

The question then becomes, given that the industry is unlikely to get all it wants on the cost and regulation front, is Australia's boom in LNG going to end in 2018, with the projects currently being planned either being scrapped or deferred indefinitely?

DEMAND ASSUMPTIONS, GLOBAL RISKS


The first assumption that you have to make is that the estimates for LNG demand over the next decade are accurate.

By 2025 global LNG demand will be about 450 million tonnes, according to estimates by industry consultants Wood Mackenzie, with a supply shortfall of about 100 million tonnes.

This scenario offers justification to continue to develop LNG projects, but the key is going to be costs.

While the United States currently enjoys a cost advantage over Australia, any new projects beyond the 60 million to 70 million tonnes likely to come on stream are likely to have higher costs.

Developments will be forced to compete for skilled labour and will also face higher input costs as rising gas demand for export will boost U.S. gas prices from their current low levels.

Other prospective LNG areas, such as the east coast of Africa, also suffer high costs, although more because of remoteness and lack of existing infrastructure.

Political risk in Mozambique is also significantly higher than in Australia, and project developers there may struggle to secure financing from increasingly risk-averse bankers.

Canada is also touted as a source of big LNG volumes, but developments there will have to overcome geographic obstacles in the shape of the Rocky Mountains, native land title issues and environmental activism.

All these issues mean that Australia's LNG future isn't as endangered as the oil and gas companies are perhaps making out.

What is clear though is that costs will at least have to be better controlled and industry, governments and even the labour unions will all have to try harder to get along with each other.

The most likely end result is that while these issues are sorted out, and also while everybody waits to see if LNG demand is going to be as strong as forecast, the timelines for project approvals will start to slip.

The second LNG investment boom in Australia, if it happens, will be a lot more cautious and drawn out.


By Clyde Russell
 

Maritime Reporter September 2014 Digital Edition
FREE Maritime Reporter Subscription
Latest Maritime News    rss feeds

Legal

NAO Announces Financials, Declares Dividend

Nordic American Offshore Ltd. has declared a dividend of $0.45 per share for 3Q2014, as previously announced. This is the same dividend as for the previous two quarters.

Kirby Corp. Announces Record 3Q Results

Record 2014 third quarter earnings per share of $1.34 compared with $1.21 in the 2013 third quarter, which included a $0.08 benefit due to the reduction of the United earnout liability.

Danny Broad Appointed to ARENA Board

The Chair, Board members and staff of the Australian Renewable Energy Agency (ARENA) are delighted to advise that Danny Broad has been appointed by the Australian Government to the Board of ARENA.

Ports

Partnerships Key to Caribbean Maritime Security

Planning and execution of port and maritime safety and security in Caribbean region is all about partnerships Maritime security and safety experts are meeting in Nassau,

Braemar Hosts Insurance Experts

Braemar (incorporating The Salvage Association) welcomed an invited group of marine insurance professionals onto its specialist port and shipyard familiarization

St. Lawrence Seaway Receives Strike Notice

The St. Lawrence Seaway Management Corporation (SLSMC) was served a 72-hour notice to strike by UNIFOR, a group representing the Seaway’s 460 unionized employees.

Finance

Confidence High in UK Logistics Sector

The latest U.K. Logistics Confidence Index commissioned by Barclays and Moore Stephens reveals that confidence in the U.K. logistics sector remains high but more

Statoil Invests $1.5b in US Offshore Project

Statoil together with co-owners in the Stampede development in the Gulf of Mexicohas sanctioned the Stampede project in the U.S. Gulf of Mexico. Statoil said it will invest $1.

Vale CEO: Coal Deal Soon

Brazilian mining company Vale SA is close to making a "strategic" announcement concerning its coal unit, the company's chief executive Murilio Ferreira said on

Energy

Partners Deliver Modular Floating Tidal Energy Platform

A group of offshore companies, including Bluewater, Damen and Van Oord among others, has partnered for a floating tidal energy platform a project to generate clean electricity,

Statoil Invests $1.5b in US Offshore Project

Statoil together with co-owners in the Stampede development in the Gulf of Mexicohas sanctioned the Stampede project in the U.S. Gulf of Mexico. Statoil said it will invest $1.

CMA CGM to Retrofit 10 More Bulbous Bows

The CMA CGM Group said it will retrofit 10 of its vessels’ bulbous bows to achieve improved energy efficiency for slow steaming. The modifications are in addition

LNG

US Natgas Exports Would Raise Energy Prices but Boost Economy

Expanded U.S. liquefied natural gas exports would mean a modest price increase for domestic consumers, but the higher costs would be offset by a boost to the economy, the U.

Korean Register to Drive LNG Fuelled Shipping

Korean Register (KR) will work alongside the Asia-Pacific Economic Cooperation Secretariat (APEC) to promote the use of LNG fuelled ships in the APEC region. APEC

Minimize the Risks, Think Cold Bonding

Cold bonding: a safer alternative to hot work Hot work required for welding, grinding and cutting operations presents certain potential hazards when conducted

Government Update

Rep. Cummings Receives Maritime Service Award

On Wednesday, October 29, Congressman Elijah E. Cummings (D-MD) delivered keynote remarks at APL Maritime’s Senior Management Conference, and received an award

Two Great Lakes Toxic Hotspots Restored

EPA announces removal of two toxic hotspots on Lake Superior and Lake Michigan from binational list The U.S. Environmental Protection Agency today announced that two U.

First Libra Offshore Oil Well Confirms Discovery

Libra consortium reports that drilling the first well in the area extension of Libra, the 3-BRSA-1255-RJS (3-RJS-731), confirmed the discovery of good quality

 
 
Maritime Careers / Shipboard Positions Naval Architecture Offshore Oil Pipelines Port Authority Salvage Ship Repair Shipbuilding / Vessel Construction Sonar Winch
rss | archive | history | articles | privacy | terms and conditions | contributors | top maritime news | about us | copyright | maritime magazines
maritime security news | shipbuilding news | maritime industry | shipping news | maritime reporting | workboats news | ship design | maritime business

Time taken: 0.2719 sec (4 req/sec)