* High costs trump attractive supply, stability, regulatory
* New supply competition to put pressure on LNG prices
* Resource projects cost 40 pct more in Australia than U.S.
By Sonali Paul
PERTH, April 11 Stung by soaring costs, the gas
industry paints a gloomy outlook for new liquefied natural gas
(LNG) projects in Australia, putting at risk $180 billion of
developments from 2018 onwards.
While Australia enjoys political stability and is close to
Asian customers, big cost overruns at a series of giant offshore
projects have dismayed companies like Chevron,
ExxonMobil Corp and France's Total SA.
"This wage growth is what is currently crippling Australian
industry and is simply not sustainable," Chevron Australia
Managing Director Roy Krzywosinski said to a chorus of approval
at the Australian Petroleum Production and Exploration
Association (APPEA) conference this week.
Nearly $200 billion worth of gas projects are nearing
completion with seven LNG projects due to start exporting gas
between late 2014 and 2017, set to push Australia ahead of
Qatar as the world's largest LNG producer.
All eyes now are on whether another $180 billion worth of
potential new or expanded projects will be developed next, or
whether money will flow instead to LNG projects in North
America, east Africa and elsewhere.
"In Australia there is plenty of gas. Business conditions in
Australia are pretty good. The main problem in Australia is
cost," Jean-Marie Guillermou, Asia Pacific chief for Total
Exploration and Production, told Reuters.
Costs have shot up over the past few years as energy
companies and iron ore and coal miners, which are all building
multibillion dollar projects at the same time, have competed for
local equipment and a limited pool of workers.
Under workplace laws set by the previous Labor government,
companies had to negotiate "greenfield agreements" with unions
before work could start on any new projects. The law set no time
limits for negotiating those agreements, so unions were in a
strong position to drag out talks and call the shots.
If companies resisted their demands, unions could delay the
start of work on LNG projects, delays that companies could not
afford in the race to be first to market, Australian Mines and
Metals Association spokesman Tom Reid said.
As a result, they won conditions that industry executives
and Australia's conservative government say are enjoyed by no
other workers around the globe. An industry study pointed to
cooks and laundry hands earning up to A$350,000 a year
installing rigs and pipelines.
Chevron Krzywosinski said costs on the $54 billion Gorgon
LNG project, Australia's biggest resources project, were about
40 percent higher than in the United States.
For Chevron, negotiating costs down will be key to whether
it decides to expand Gorgon, one of several expansions of
existing projects - so-called brownfield developments - that
Australia needs in order to boost growth.
Unions are not relenting. The Maritime Union of Australia
(MUA) is battling Chevron and its contractor Tidewater Inc
, arguing that maritime workers make up just 1 percent of
the cost of building a project like Gorgon.
"We make no apology for trying to get a good deal for our
members, who are the ones who spend weeks at a time working away
from home in very tough conditions," Chris Cain, Western
Australia branch secretary of the MUA, told Reuters in an email.
"It's really difficult to take costs out," said Mike Lynn,
oil and gas leader at consultants Deloitte. "That's going to be
slow, painful and combative with unions."
With supply competition likely from the U.S. shale gas boom,
as well as Canada, Mozambique and Tanzania expected over the
long run, LNG pricing is also likely to come under pressure,
which would further squeeze margins on Australian projects.
"How much you're selling it for is also moving against
Australia," said Paul Griffin, an energy partner at law firm
Allen & Overy.
Australian Industry Minister Ian Macfarlane said this week
he saw little chance of any new project extensions.
"I'm starting to wonder if there will be a brownfield
(project) in the next 10 years," he told reporters.
But not all the signs are bad.
Australia's ample LNG supplies, planned changes to workplace
laws and the prospect of cheaper financing may still make new
projects viable, say industry analysts.
Union power will be blunted if the conservative Liberal
government is successful in amending workplace laws to set time
limits on negotiation of greenfield agreements and curb
provisions on when a union can enter a workplace.
That legislation has been passed by Australia's lower house
of parliament and is awaiting approval in the upper house
Senate. In July, the makeup of the Senate will change in favour
of the government, at least on workplace issues.
Companies are also leaning toward cheaper floating LNG
projects offshore for new projects. Floating plants don't need
pipelines to shore, so require fewer construction workers.
Industry executives and government officials see floating
LNG as the best option for the Browse project, being studied by
Woodside Petroleum ; the Scarborough project, led by
ExxonMobil; and the Bonaparte project, led by GDf Suez.
The Browse partners expect to save 20 to 30 percent of the
estimated $45 billion project cost by using floating LNG.
Funding is likely to be cheaper, as Australian banks are
facing a slowdown in credit growth and are offering cheaper
rates on debt, said Kevin Jamieson, director of natural
resources at National Australia Bank.
"Banks are desperately looking for quality new deals," he
said, adding that Asian demand was likely to be strong as China
turned to gas to combat pollution. Chinese and Japanese
utilities preferred to lock in gas from Australia rather than
east Africa because of its lower geopolitical risk.
World demand for LNG is forecast to reach 470 million tonnes
in 2030, according to APPEA, implying more than 200 million
tonnes of new LNG capacity will be needed. Australia is expected
to be exporting nearly 85 million tonnes a year by 2018.
APPEA said projects making up more than double that 200
million tonnes are under consideration globally.
(Reporting by Sonali Paul; Editing by Richard Pullin)