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Investments in Australian LNG Projects Cool amid Cost Blowouts

Australia may not see any more new liquefied natural gas (LNG) projects in the medium-term – perhaps with the exception of Royal Dutch Shell's Arrow LNG venture Queensland – as the issue of project delays brought on by cost blowouts has started to worry investors.

Investments in Australian LNG Projects Cool amid Cost Blowouts Investments in Australian LNG Projects Cool amid Cost Blowouts

Australia may not see any more new liquefied natural gas (LNG) projects in the medium-term – perhaps with the exception of Royal Dutch Shell's Arrow LNG venture Queensland – as the issue of project delays brought on by cost blowouts has started to worry investors.

All of the seven world-scale LNG projects under construction in the country; Gorgon, Prelude, Wheatstone and Ichthys in Western Australia, and Queensland Curtis LNG (QCLNG), Gladstone LNG (GLNG) and Australia Pacific LNG (APLNG) in Queensland, are experiencing delays and cost increases, data from a presentation made by the International Energy Agency (IEA) at a gas summit in mid-November showed.

In its presentation, the IEA noted that amongst the 13 LNG projects currently under construction globally with 2017 start dates, "there is much uncertainty on the impact of delays, notably in Australia."

The data presented by the IEA was reiterated by Santos' CEO and Managing Director David Knox in late November in an address he gave at an energy conference in Australia.

"Recent studies show that Australia is the most expensive offshore exploration and production location in the world today – three times as expensive as the U.S. Gulf Coast, and slightly more expensive than Norway."

"The Australian LNG projects currently under construction are now 80 percent more capital intensive than those already in operation," Knox added.

A published report by the Australia's Bureau of Resources and Energy Economics in June this year shed light on the burgeoning costs. It revealed that the Gorgon and Wheatstone projects have a capital cost of around $3 billion per million tonne of annual capacity, while the Ichthys project has a cost of $4 billion per million tonne of annual capacity. By comparison, the Angola LNG project in southern Africa has a capital cost of below $1.7 billion per million tonne of annual capacity.

The Gorgon project is likely to see heightened cost projections moving into next year. The Australian Financial Review (AFR) newspaper reported Nov. 14 that the giant development could face cost increases of more than $21 billion (AUD 20 billion) to over $63 billion (AUD 60 billion). Chevron Corp, the operator of the project, responded on the same day stating that it will require a few more months before it can update the project's current $44.9 billion (AUD 43 billion) price tag.

Shell – which is also an investor in the Gorgon project – said Nov. 15 that when it took the final investment decision (FID) in 2009, it had projected a higher budget than the initial $37 billion projected by Chevron, and a later startup date for first gas. The oil major added that its cost estimates have been revised upwards from its FID assumptions, and that the company remains conservative on the startup date.

Other high-profile LNG projects that have already announced cost increases this year include Santos' GLNG project and BG Group's QCLNG project. Santos said in late June this year that the cost of its GLNG project will increase by 16 percent to $18.5 billion, while BG Group disclosed in May that the company could need to spend $5.4 billion more than it had originally estimated for the $20.4 billion-QCG project.
Shortage of Skilled Manpower a Critical Concern

Knox pointed out in his address that the key factor driving up LNG project costs is labor needs.

"A lot of this cost is labor, with the cost of Australian labor double that of many of our competitors, and productivity in most cases lower. At Santos' GLNG Project for example, labor costs make up between 50 to 60 percent of total project costs." Knox said.

He also acknowledged that Australia's biggest hurdle on the skills front is its shortage of experienced subcontractors and specialist suppliers.

Knox's observation is in line with figures presented by Australian Workforce and Productivity Agency's (AWPA) board member Keith Spence earlier in June. Spence, who spoke at a natural gas event in Perth, noted that Australia faces a critical lack of LNG and coal seam gas (CSG) operators, with the country having to beef up the number of its 180 to 200 process operators to 1,500 by 2017/18.

Australia's need for quickly scaling up on skilled manpower for its LNG industry will be critical from the period 2014 to 2015, as at least three new LNG projects are scheduled to be started up during the timeframe.

"Without the right people – projects ultimately experience further delay, and increased costs," Konx explained.

"This is not about a push to bring in cheap, unskilled workers from overseas. The oil and gas industry needs a mix of highly skilled and semi-skilled workers. To successfully address the skills challenge, we need to open our minds as a nation, and realize that there is no skills shortage if we truly see ourselves as a part of Asia. The skills and talent are plentiful in our region, and we are well positioned to take advantage of it … We have to realize that opening up as a nation has its true advantages," Knox said.

Competition for skilled resources is however not only confined to industry players in the LNG industry. The country's mining sector, which is also experiencing a skills shortage in the same talent field, sees companies involved in new mining projects offering attractive salaries and benefits packages for the same talent pool, Spence had observed.
Strong Local Currency, Regulatory Hurdles

Besides escalating labor costs, a strengthening Australian dollar and tighter local regulations also contribute to Australia's LNG project budget-blowouts.

Chevron stated in July that it was reviewing the cost of Gorgon amid a 20 percent rise in the Australian dollar since construction started in 2009. The announcement is particularly alarming to investors as around half of Gorgon's project's costs are in local currency.

On the regulatory front, the Queensland and New South Wales government recently introduced policies to ensure the protection of prime agricultural land. The policies, which target primarily coal seam gas (CSG) projects, requires that CSG development proposals within 1.2 miles (2 kilometers) of strategic agricultural land be assessed by an independent expert panel prior to proceeding with development applications.
Investment Decisions Turn Cautious

Amid the recent cost pressures, investing companies have adopted a decidedly cautious approach when it comes to sinking dollars into additional project developments.

Shell revealed Nov. 20 that it may delay its FID on the CSG-based Arrow LNG project, a joint venture with PetroChina forecasted to cost $20 billion. If the partners approve of the venture, Arrow LNG would be the fourth new project to be constructed on Curtis Island in Gladstone, which already hosts three LNG developments under construction.

Shell acknowledged considerable permitting, infrastructure and development bottlenecks on Curtis Island, and that it is not rushing into an FID at present.

Meanwhile, a decision to invest in a fourth LNG production train at the Gorgon is also met with a measured approach.

Shell stated that while there had been good exploration success around Gorgon, which could be good grounds for a fourth LNG train at the project; it will likely announce its investment decision on the project next year.

"We've not approved the front-end engineering and design (FEED) on train four at this stage; that is a decision which could come in 2013 and we are taking on the learning from the base project first," the company said in a statement.

Source : Neftegaz.RU