Australia must 'earn its right' to a share of LNG boom
The high cost of doing business is restricting development, writes Philip Wen.
The oilmen are banking big on a natural gas boom. Global energy giants including ExxonMobil, Shell and Chevron are piling in with Australian partners, bankrolling more than $200 billion to drill thousands of gas wells across inland Australia, and to lay pipes crossing the length of entire states that feed into LNG tanks the size of stadiums.
It is all in the name of meeting the world's soaring energy needs, while turning a tidy profit.
Indeed, Australia, they constantly remind you, will overtake Qatar as the world's largest exporter of liquefied natural gas by the turn of the decade. Yet before most of the country has begun to fathom the natural gas industry's massive growth in the past few years, could investment already have peaked? And much like the minerals boom, will Australia benefit as much as it should or instead see vast dislocations exacerbating its multi-speed economy?
At the annual APPEA conference in Brisbane this week there emerged a consistent and predictably parochial narrative. Industry executives and resource ministers alike agreed that surging energy demand, combined with a desire for the world to wean itself off coal, would see the world increasingly depend on natural gas. By 2035, natural gas is expected to generate 35 per cent of the world's energy use, up from 23 per cent now.
But despite its abundance of gas, Australia's attractiveness as a place to invest has taken a hit due to its high costs. An independently prepared McKinsey report, released at the conference this week, found the cost of building new LNG projects had "increased tremendously in the past decade and is now 20 to 30 per cent higher" than the competition in the US and East Africa.
The consulting firm said the high Australian dollar and geological factors meant Australia needed to reduce its costs significantly to attract the next wave of LNG investment. But it would require radical productivity gains and, it stressed, significant effort from government and industry. But the writing has been on the wall for some time now, and Japanese oil group Inpex's $US34 billion plunge into the Ichthys project near Darwin in January last year is increasingly seen as possibly the last greenfield LNG project Australia will see.
The Gorgon mega-project in Western Australia, operated by Chevron as 47 per cent owner in a joint venture with Shell and ExxonMobil (25 per cent each), is set for first gas in less than two years. But its project costs blew out by 20 per cent to $52 billion last year.
Chevron Australia managing director Roy Krzywosinski warned high costs in Australia could deter global companies from making future investments. "Nothing is a slam dunk; you have to earn everything you do," he told reporters at the conference. "So the question of cost structure is an important issue, especially if you have an international portfolio of competing priorities."
Wild cost blowouts have rendered the original development plans for Woodside's $45 billion-plus Browse project unviable. Much of the blame has been pinned on labour costs, in part driven by union demands.
Woodside chief Peter Coleman and joint venture partner Shell are trying to convince its other partners to pursue floating LNG, essentially having the plants built elsewhere on a 500 metre long barge and floated into place for Browse.
It means the state governments won't benefit from the construction jobs of an onshore build, but Coleman said Australia's rising cost profile meant it was a "natural progression" for the industry.
"We've been working on it for quite some time now," he said. "As we looked at our strategic plan for the company we recognised we needed to have alternatives. We needed to do something different."
ExxonMobil and BHP have also announced they would use FLNG for its Scarborough venture. "When we look around the world we look at the most attractive places to develop, Australia has a lot of advantages but it also has significant disadvantages in labour costs and labour productivity," ExxonMobil vice-president Mark Nolan said.
"The government has a role to help us manage labour relations, there's no question about that, it's a significant factor."
The Woodside-operated North-West Shelf project has been producing natural gas through the Karratha plant since 1984, but the wave of investment in the past five years has been unprecedented. The trigger has been the leap in understanding extraction techniques which has precipitated the shale gas revolution in the US. It has unleashed a glut of cheap gas into the US energy grid and rejuvenated its manufacturing sector.
Cue a rush to replicate the success around the world, and to supply that gas to Asia, where energy is scarce and incessantly in demand. In particular it has seen a land grab by three $20 billion-plus developments happening side by side in Queensland's Gladstone: QCLNG operated by British Gas-owned QGC, GLNG operated by Santos and Australia Pacific LNG operated by Origin. But these also have been beset by cost pressures, with Santos announcing a 15 per cent cost blowout in June last year.
Meanwhile, the surge in coal seam and shale gas exploration has sparked concerns about its effect on the environment which have spread through the community, none more so than in NSW. A big part of that is because the drilling is happening closer to urban or farming areas.
Geoscience Australia chief executive Chris Pigram said it was a quirk of fate that the coal seams ripe for gas extraction also "happens to sit under our prime farming land".
"Frankly the oil and gas industry has met the farmers in a very intimate way for the first time," he said.
John Cotter, the chairman of Queensland's GasFields Commission, said there were also "unacceptable" discrepancies in the way farmers were being compensated for their land when they agreed to sell, mainly based on their ability to negotiate. "You have some people being paid a pittance and then others who have done well because they've taken these guys right to the wire," he said.
The oil and gas industry is furious that NSW in particular has toughened environmental regulations around coal seam gas exploration. In February, the state government introduced a ban on coal seam gas exploration within two kilometres of residential and residential growth areas.
NSW Resources Minister Chris Hartcher said the level of intensity in the coal seam gas debate was unlike anything he had seen, and blamed the industry in part for failing to initially engage with communities and explain the perceived risks of coal seam gas exploration.
"That vacuum has very quickly been filled by extremist Greens, fortified by a level of ignorance in the community," he said.
The Greens last week announced they would push for a ban on new coal seam mining, a move they said was sparked by community concerns about coal seam gas extraction, and its impact on farming land and groundwater.
But with the Greens and Labor expecting to suffer heavy electoral defeats in September, it may well be the oilmen that win out. With the minerals boom fading, the oil and gas industry has been applying the pressure on both sides of government.
Krzywosinski pointed out that Gorgon kept 14,000 people employed. "By any measure that's a big number," he said.
Australia was well-placed to take advantage of a global demand for natural gas, but stood to lose out on $150 billion in investment if its cost environment did not improve.
InvestSMART FORUM: Come and meet the team
We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free