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

Legal

Oil Deal Between Iraqi Kurdistan & Baghdad Welcomed

The United States welcomes an agreement between Iraq's central government in Baghdad and its northern Kurdistan region over the management of oil exports, U.

Canadian Pipeline Expansion Continues

Kinder Morgan Energy Partners said on Friday that crews have resumed survey work related to its Trans Mountain pipeline expansion project in the Vancouver suburb of Burnaby,

Orlando Ashford is President, Holland America Line

Holland America Line announced today that effective Dec. 1 Orlando Ashford will join the company as president to lead the award-winning cruise line's brand and business,

Ports

October Imports up 9% at Port of Oakland

Containerized imports shipped through the Port of Oakland were up 9.17% in October from a year ago, the port said, citing the surge as the biggest jump in import cargo volume in six months.

BG Group's Queensland Curtis LNG to Ship First Cargo

BG Group is set to ship the first cargo of liquefied natural gas from its flagship gas project Queensland Curtis LNG on Dec. 20, a source familiar with the matter told Reuters.

Belgian Strike to Impact Antwerp Port

A strike in parts of Belgium on Monday is expected to disrupt rail services and one of Europe's largest ports as trade unions and workers voice their anger over

Finance

Time-out for Kwanza Drilling

Statoil has decided to cancel the Stena Carron rig contract after fulfilling the work commitments in the Statoil-operated blocks 38 and 39 in the Kwanza basin offshore Angola.

Oil Deal Between Iraqi Kurdistan & Baghdad Welcomed

The United States welcomes an agreement between Iraq's central government in Baghdad and its northern Kurdistan region over the management of oil exports, U.

Nigeria to Cut Petrol Subsidy by Half

Nigeria plans to cut subsidies on petroleum products by half next year after sharp falls in global crude prices, spurred the government to revise its 2015 budget downwards,

Energy

Gazprom Transgaz Ufa Organizes Arts Festival

Over 200 healthy children and children with disabilities from Bashkortostan as well as the Volga Region participated in the Breaking the Barriers second interregional children’s arts festival,

Time-out for Kwanza Drilling

Statoil has decided to cancel the Stena Carron rig contract after fulfilling the work commitments in the Statoil-operated blocks 38 and 39 in the Kwanza basin offshore Angola.

President Pryor Retires from ExxonMobil Chemicals

Stephen D. Pryor, president, ExxonMobil Chemical Company and vice president of Exxon Mobil Corporation, has elected to retire on January 1, 2015, after more than 44 years of service.

LNG

HHI to Build FSRU for Höegh LNG

A new Floating Storage and Regasification Unit (FSRU) will be built by the Korean shipbuilding Company Hyundai Heavy Industries (HHI). This FSRU will be the fifth

BG Group's Queensland Curtis LNG to Ship First Cargo

BG Group is set to ship the first cargo of liquefied natural gas from its flagship gas project Queensland Curtis LNG on Dec. 20, a source familiar with the matter told Reuters.

Europe Stockpiling Low Cost, Surplus LNG

Demand from top Asian buyers drops sharply; Asian, European gas price spreads converge. Europe set to becoming dumping ground for LNG. Europe is set to become

Government Update

Nigeria to Cut Petrol Subsidy by Half

Nigeria plans to cut subsidies on petroleum products by half next year after sharp falls in global crude prices, spurred the government to revise its 2015 budget downwards,

Venezuela Ships First Crude Mixed with Algerian Oil to China

Venezuela is sending its first shipment of crude mixed with Algerian light oil to China, according to state oil company PDVSA and traders.   Venezuela recently

China Building Island Big Enough for Airstrip

Satellite images show China is building an island on a reef in the disputed Spratly Islands large enough to accommodate what could be its first offshore airstrip in the South China Sea,

 
 
Maritime Contracts Maritime Standards Naval Architecture Navigation Offshore Oil Pod Propulsion Salvage Ship Repair Ship Simulators Shipbuilding / Vessel Construction
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: 0.3174 sec (3 req/sec)