High wages pushing LNG plants offshore

The rising cost of building liquefied natural gas plants in Australia, where energy workers earn the highest salaries in the world, is forcing developers out to sea in search of billions of dollars in savings.

Exxon Mobil plans to use the world's largest ship to turn gas into liquid at an offshore field, eliminating the need for investment in pipelines and port facilities. Woodside Petroleum is studying sea-based technology since ditching plans this month for an onshore plant for its Browse project off Western Australia.

After starting work on $175 billion in liquefied natural gas terminals on land, developers are considering more than $80 billion in floating projects to keep Australia competitive with suppliers in North America and east Africa. The floating export terminals will be built in Asian shipyards, where labour costs are lower.

"A lot of people have been saying Australian LNG is now over, it's going to be priced out of the market by US LNG exports and competition from Canada and east Africa," Citigroup analyst Mark Greenwood said. "In our view, we are going to see continued investment in Australia, just a different sort."

The engineering challenges are massive. Shell's Prelude vessel, vying to be the first floating liquefied natural gas facility in the world, will be as long as the Empire State Building and six times the weight of the largest aircraft carrier. Exxon proposes a vessel spanning 495 metres, seven metres longer than the Shell plant.

Australian oil and gas workers earn about $160,000 a year on average, 35 per cent more than employees in the US and almost double the global average, according to a survey this year by recruiting company Hays Plc and Oil and Gas Job Search. That compares with $90,000 in Britain, says the study.

Floating LNG may be almost 20 per cent cheaper than building a project on land for Woodside and its partners in the Browse project.

Using three offshore vessels to produce the gas would cost an estimated $35 billion, compared with a cost of $43 billion for a new development on land, Deutsche Bank analyst John Hirjee wrote in a recent report.

That's a cost of $2.92 billion per million metric tonnes of output for a floating liquefied natural gas project producing 12 million tonnes a year, compared with a cost of $3.58 billion for a conventional plant, Hirjee said.

Global demand for liquefied natural gas is estimated to grow to 400 million metric tonnes a year by 2020 from 240 million tonnes last year, said Neil Beveridge, a Hong Kong-based analyst at Sanford C.Bernstein. Of the 90 million tonnes a year of new projects that need to be approved globally in the next three years to satisfy demand by the end of the decade, as much as a third may come from proposed floating plants and expansions of onshore developments in Australia, he said.

Australia's vast gas reserves and proximity to Asia have put the nation in pole position to meet demand in Japan, China and South Korea and become the world's biggest exporter within the decade.

The country has six onshore projects with long-term contracts under construction, in addition to the three already operating.

However, the resources boom in Australia has inflated costs to the point where onshore developments are becoming too expensive. The budget last year for Chevron's Gorgon project rose 21 per cent to $52 billion because of higher labour expenses and gains in the Australian dollar. BG Group's Queensland Curtis venture rose 36 per cent to about $20 billion.

"The advantage is that a lot of the work can be done outside the high-cost environment of Australia," Anthony Patten, an energy specialist at the law firm Allens, said.

Shell is building the Prelude vessel in Geoje, an island off the coast of South Korea. When Prelude is complete, it will be towed to a site about 200 kilometres off Australia and will chill gas into liquid and transfer the fuel to vessel for transport to customers. It is due to start production in about 2017.

Exxon plans to decide whether to go ahead with the Scarborough floating liquefied natural gas venture by 2015, with the project starting production by 2021, according to documents filed this month with the federal government. Among other floating projects proposed off Australia is Woodside's Sunrise venture, which may cost $12.6 billion, Deutsche Bank said.