Costs in focus after Browse project dumped
Woodside's decision to shelve its controversial $40-billion-plus Browse venture has renewed focus on Australia's lagging competitiveness in mega projects.
The oil and gas giant said the Browse joint venture, which would have been built at the environmentally sensitive James Price Point near Broome in the Kimberley region of Western Australia, was not commercially viable and it was seeking cheaper options. It ruled out public policy as a factor in its decision.
Alternative ventures included floating technologies, favoured by venture partner Shell, a pipeline to the North-West Shelf in the Pilbara or smaller onshore facilities. Any development options would need to deliver significant cost savings, Woodside chief executive Peter Coleman said on Friday.
"The Browse development needs a fundamental change in cost structure," Mr Coleman said. "We've seen over time that creeping cost and it's gone up and it's taking margin. And you are seeing in the press every day that our customers are saying to us very clearly, 'No longer can we pay for your expensive projects. You need to look after them'."
LNG projects make up the bulk of Australia's planned mining investment, so cost overruns or cancellations have the potential to throw out projections.
The Bureau of Resources and Energy Economics last year predicted six major LNG projects in Australia were valued at $166 billion - only for the number to swell by at least another $11 billion after Gorgon and Australia Pacific announced cost blowouts.
Analysts said the blowouts were a reflection of the crowded LNG space in Australia, where projects have been competing for a relatively fixed workforce.
"Up until three or four years ago, we've only ever had in Australia one LNG project in the construction phase at once, and right now we have seven LNG projects in the construction phase at the same time," UBS energy analyst Nik Burns said.
Australia has the highest-paid energy sector workers in the world, with average annual salaries of more than $155,000, ahead of Norwegians' $145,000 yearly pay, an international study reported.
At the same time, the strong dollar, regulatory compliance costs and competition from other countries with lower costs, such as the US, Canada and Mozambique, has made Australia less favoured.
The Australian dollar is now trading at its highest level in trade-weighted terms since the end of 1984, driven higher in part because of expectations the mining boom would spur exports.
Just hours after Woodside made its Browse decision public, the company lodged an interest in developing an LNG project at Grassy Point in Canada. Questions now hang over Arrow, Shell's LNG venture in Queensland, which is in the feed stage and at risk of not proceeding, analysts said.
Coalition resources spokesman Ian Macfarlane blamed "outrageous" industrial action and the soaring dollar, saying poor productivity was "making resource projects prohibitively expensive".
But Australian Workers Union national secretary Paul Howes hit back, calling Woodside's actions "the great Australian ripoff".
"They have sacrificed tens of thousands of Australian jobs at the altar of higher profits for Woodside and [partner] Shell executives."
Despite the cost blowouts, several economists said mining investment had not yet peaked and the resources story remained positive for Australia, a view shared by Prime Minister Julia Gillard.
"We will be seeing the resources boom at work in our economy for a long time to come," she said.
HSBC's chief economist for Australia, Paul Bloxham, said the market had known for some time there were not enough new projects starting to keep mining investment rising. "[Mining investment] rose by 40 per cent last year and it rose about 40 per cent the year before, and no part of the economy can continue at that sustained pace," he said.