By Lauren Barrett
CONCERNS surrounding Australia’s ability to capture the next wave of LNG investment was a major talking point at the South East Asia Australia Offshore and Onshore Conference (SEAAOC), held in Darwin, with hungry competitors threatening to grab a large slice of the lucrative mega projects next in line.
Australia’s mega LNG developments suffered from cost blowouts and project delays in recent years, and with no major LNG project being sanctioned in about three years, it was overwhelmingly evident that there was concern among the crowd.
Australia currently has nearly $200 billion worth of LNG projects under construction, and by 2018, it will have gone from three to 10 operating LNG projects, exporting around 85 million tonnes per annum.
By 2020, the industry will be pumping $65 billion into the economy and will account for 3 per cent of Australia’s gross domestic product.
From Chevron’s massive Gorgon project off the northwest coast of Western Australia to the three LNG developments taking place on Queensland’s Curtis Island, it is no wonder Australia is being touted to overtake Qatar as the world’s leading LNG producer in the near future.
But as ConocoPhillips president Australia West Todd Creeger said, in some way, Australia is in the final stages of an LNG construction boom.
According to APPEA group executive and BG Group non-executive Martin Ferguson, the situation isn’t a pretty one.
“In recent years our industry’s costs have risen and productivity has declined,” he told delegates.
“Our international competitiveness has slipped dramatically just as some top new players have entered the game.
“The US, Canada, Mozambique, and Tanzania are each now developing or planning to develop LNG projects targeting our Asian markets. Each of them, importantly, has cost structures and regulatory environments that allow them to produce LNG between 20% and 30% more cheaply than we can as a nation.”
Mr Ferguson questioned whether or not Australian was smart enough to compete or whether we had become “complacent as a nation and complacent as an industry.”
Mr Creeger said Australia had all of the advantages that should allow the industry to grow well into the future, including a stable fiscal environment and a workforce with a can do attitude. However, Mr Creeger echoed Mr Ferguson’s earlier comments about increasing costs.
“We have seen concerning signs of cost escalation that may jeopardise the next wave of development,” he said.
“We are currently seeing very high costs for Australian projects under construction, ranging from $1250 to $2500 per million tonne per annum. We’ve seen these cost pressures due to a strong Aussie dollar, high labour and logistical cost, regulatory burdens and remote locations with little existing infrastructure.
“Cost is a major barrier to the next wave of LNG projects in Australia.”
Call to overhaul IR act
According to Mr Ferguson, Australia needs to overhaul its industrial relations act to ensure it can compete for the next wave of investment.
In his address, Mr Ferguson told SEAAOC delegates that the current Fair Work Act facilitated the continuing ratcheting up of wages and allowances so that project owners were no longer confident about the cost of labour over the full life span of construction.
“The Fair Work Act must be revised now, not in the next parliament or in the parliament after that, especially in regards to major resource projects,” he said.
APPEA recently released a blueprint for workplace relations reform to drive productivity growth and improve global competitiveness, advocating a new form of enterprise agreement that would specifically apply to major capital projects, such as large mines and multi-billion dollar LNG plants.
Mr Ferguson said the Major Project Agreements would reflect both the scale of the projects and the timeframe required to develop them. They would limit the time available to negotiate and would apply for the entire period of project construction – rather than being renegotiated every four years.
“This would prevent, in our opinion, the most recent deals struck automatically becoming the minimum benchmark for the next irrespective of the change in the nature of the labour market,” he said.
Mr Ferguson lamented the repeated disruptions on projects caused by unions, referring to the CFMEU’s most recent threat to delay the completion of three new LNG projects under development in Curtis Island “with demands for, guess what, more time off.”
The project disruptions occurred at a time when Queensland’s unemployment rate reached 6.8 per cent, with the State suffering more job losses in any one month than any other State or Territory.
“In those circumstances, I would have thought that anyone working on Curtis Island would have been grateful to have a job rather than demanding more time off,” Mr Ferguson said.
Meanwhile, Mr Creeger said there were other impediments to Australia being able to capture future capital investment in oil and gas developments.
“Over the past several years, we’ve seen a worrying trend where groups opposed ideologically to non-renewable sources of energy are having an impact on government and regulatory policy,” he said.
“The moratorium on fracking in New South Wales and Victoria is one such example and potentially removes the advantages of [Australia’s] abundant resource potential.”
Mr Creeger called on the government to put in place sound policies based on facts.
“We need to make sure governments make policy that is based on facts, that we permit the latest technology like FLNG and that we not put policies in place that distort market dynamics like gas reservation,” he said.
Australia needs to capitalise on FLNG and brownfields expansion
With global demand for LNG forecast to reach 470 million tonnes per annum by 2030, it’s anticipated that more than 200Mt in new capacity will be needed.
This supply opportunity, coupled with Asia’s “ferocious appetite for gas” is why Santos WA, NT and Asia vice president John Anderson is upbeat about Australian LNG.
“There is a wonderful opportunity for Australia with respect for continuing to supply LNG into Asia,” he said.
“My message would be that we need to grab the expansion agenda.
“I think we are probably still digesting a lot of the investment that has taken place with these LNG projects…but I think in Australia we need to lift our vision and we need to start thinking about what are the next LNG investment opportunities we have as a nation.”
Browfields expansion is an opportunity Mr Creeger is keen for Australia to capture, and believes the NT is in the front seat to do so.
“LNG infrastructure in Darwin and a climate that promotes and welcomes investment means the Northern Territory projects are well placed to compete in the global LNG market,” he said.
Mr Creeger said expanding Darwin LNG was an option by either tapping into the Poseidon gas field, using backfill or taking advantage of floating technology.
“Expansion at Darwin LNG has the opportunity to capture cost savings,” he said.
“Utilising an existing and experienced workforce can help deliver efficient operations and lower costs.”
As for FLNG, Mr Creeger said ConocoPhillips had spent the last decade developing floating technology, and believed that future investment in Australia could be generated from the processing technique.
“Australia has the opportunity to leverage off a first mover advantage provided by Shell’s Prelude project to position itself as a global FLNG hub and expert.”
We need to celebrate our industry achievements: Inpex
SEAAOC delegates had at times during the two-day conference been presented with a bit of a sombre view of Australia’s oil and gas industry and its prospects. But Inpex general manager for external affairs, Bill Townsend, provided an opposing, upbeat view which was welcomed as a breath of fresh air by many.
As the location of the company’s Ichthys LNG development, Mr Townsend has been travelling to Darwin regularly since 2007. He took the time out to reflect on how far the project had come since being sanctioned in 2012, calling it one of the world’s largest and challenging projects.
Having recently passed the 50% construction completion mark, Mr Townsend was pleased to report to delegates that Ichthys remained on schedule and within budget.
But soon into his address, Mr Townsend went on to suggest Australia was damaging its attractive investment destination status by focusing on costs.
“There is in my view to much attention [being] paid to construction costs and budget,” he said.
“If public discourse is to be believed, these two measures alone are almost what exclusively determine whether or not an LNG project is good or successful. The media hypes cost blowouts and project delays, all the while painting a grim picture of Australia’s productivity.
“While it is undoubtedly important for projects to deliver on cost and on schedule…these are but two of the many complex factors that will determine the effectiveness and value of LNG projects.”
Mr Townsend said that this “dumbing down of the metrics” did Australia’s industry no favours and simply diluted the massive contribution that the LNG sector was making and would continue to make to the Australian economy.
“The LNG industry is underpinning the Australian economy and creating real and lasting benefits that will endure for generations to come,” he said, stating that the large amount of work currently being undertaken in the country was turning it into an energy superpower.
“This is something we should all be proud of, and is certainly something worth celebrating,” Mr Townsend said.
He called for a change in the conversation, from the short-term construction phase to the long-term operational phase, which would in turn shift the focus from a comparison of cost and schedule to an understanding of the lasting benefits to be realised from the LNG industry.
Take Ichthys for example. The project will create many thousands of jobs over its 40 year life, with government from various levels expected to receive more than $100 million from project revenues.
The project has already committed more than $10 billion to Australian companies through a wide variety of contracts, $5.2 billion injected into the Territory.
“Indeed, the positive effects are already being felt,” Mr Townsend said.
Australia well positioned with a strong track record of development
Speaking to Oil & Gas Australia on the sidelines of SEAAOC, Mr Townsend acknowledged the mega LNG projects were expensive, but dismissed the view that Australia’s competiveness was waning.
“I’m not disagreeing that we should all be working to reduce costs…, but in the broader scheme of things Australia is very competitive,” he said.
“It’s well positioned geographically, but more importantly it has all of the stable political and government structures that enable companies like Inpex to invest for a long period of time with certainty.
“A first world, OECD democracy, doesn’t present that risk that some of our competing countries do.
“We have a very solid record, and we have an opportunity perhaps through brownfield expansions that are more economic than greenfields.
“I don’t think we do enough as an industry to educate the broader Australian population that this country is an energy superpower and it’s been driven largely by LNG.”
Australia was trying to adjust to the shift from a construction boom to the long-term operational aspect of projects, he said.
“There’s $200 billion worth of LNG projects being developed and what we are looking at, and what everyone has to grapple with, is the shift from the construction phase to a similar boom in the operations phase which is a shift from being labour intensive and capital intensive to a much less labour intensive environment,” he said.
On the conjecture that Australia is at risk of losing out to future LNG developments to cheaper destinations such as East Africa and North America, Mr Townsend suggested there was no logical rationale to the hype.
“Today, we are the leading supplier of gas to Japan, which is the leading importer of gas. Australia has that position,” he said.
“There’s lots of talk about North America, and yet we haven’t seen any of these projects materialise.
“If you actually look at the economics of these projects in the US, although there initial cost base is perceived to be lower, once you factor in production, transport and getting it to market, particular through the East Coast of the US through the Asia pacific, it ends up not having a significant price impact.”