(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
PERTH, April 8 The Australian oil and gas
industry is telling everybody that a second wave of investment
in liquefied natural gas (LNG) plants is at risk unless labour
and regulatory costs are cut.
The companies are unlikely to get all that they want. In
fact they may not get very much at all out of the labour unions
and the federal and state governments.
But it may not matter that much, because even with its high
costs Australia remains one of the best places to invest the
billions of dollars needed to develop a large-scale LNG project.
Australia currently has seven LNG plants under construction.
When all are completed by 2018 the nation will be the largest
exporter of the super-cooled fuel, overtaking Qatar.
Australia's three operating LNG projects produce about 24.2
million tonnes of LNG, with the seven developments being built
slated to boost that by another 61.8 million tonnes.
The problem for the oil and gas companies spending some $192
billion on the seven plants is that costs have increased well
beyond the initial budgets, while the certainty over LNG demand
and pricing has eroded somewhat.
That's not to say that current LNG projects won't have
buyers for their fuel, as the bulk of the planned output is
However, there are still projects with a total capacity of
31.5 million tonnes which are awaiting final investment
decisions, and another potential 65.8 million tonnes of
expansions under consideration.
It is this second wave of investment that the industry is
warning is at risk.
Chevron, which is developing the $54 billion Gorgon
and $29 billion Wheatstone projects off Western Australia, is
one of the companies leading the fight against high costs.
Roy Krzywosinski, managing director of Chevron's Australian
unit, told the Australian Petroleum Production and Exploration
Association conference here on Tuesday that the "window of
opportunity to turn things around isn't a couple of years
anymore, the clock is ticking."
The heart of the issue is the high labour costs and union
militancy that have driven up project costs, with Krzywosinski
saying Chevron has suffered more than 1,000 "disruptive" right
of access claims by unions since 2009.
Chevron, in a theme echoed by other companies building
projects in Australia, wants the government to amend labour
legislation to limit the rights of unions and allow for more
flexible work contracts, as well as making it easier to import
workers from overseas.
The companies also want lower regulatory burdens and more
certainty on taxes, which have been subject to change as federal
and state governments switch between the two major parties.
With the conservative Liberal Party now controlling the
federal government, and every state bar South Australia, it
seems a good opportunity to overturn the workplace legislation
put in place by the former Labor Party administration.
But Liberal Prime Minister Tony Abbott will be well aware
tht making the workplace less regulated, removing worker
protections and trying to restrict unions played a big role in
the defeat of John Howard's Liberal government in 2007.
It seems more likely that some flexibility will be
re-introduced in labour laws, but the best thing the industry
can hope for from government is a lessening of red and green
tape, and the scrapping of the carbon tax.
Union successes in gaining wage increases may also be over.
The days where a cook can earn more than $300,000 a ear working
on an offshore facility are likely to come to an end.
Wages were driven to among the highest in the world by the
fact that building seven major projects simultaneously
overwhelmed the available supply of suitable workers.
But this will fade over the next few years, and resource
companies are likely to become much more aggressive in
However, it's unlikely that wages will fall dramatically,
leaving Australia as an expensive place to do business, with
construction costs believed to be some 40 percent higher than at
equivalent LNG projects in the United States.
The question then becomes, given that the industry is
unlikely to get all it wants on the cost and regulation front,
is Australia's boom in LNG going to end in 2018, with the
projects currently being planned either being scrapped or
DEMAND ASSUMPTIONS, GLOBAL RISKS
The first assumption that you have to make is that the
estimates for LNG demand over the next decade are accurate.
By 2025 global LNG demand will be about 450 million tonnes,
according to estimates by industry consultants Wood Mackenzie,
with a supply shortfall of about 100 million tonnes.
This scenario offers justification to continue to develop
LNG projects, but the key is going to be costs.
While the United States currently enjoys a cost advantage
over Australia, any new projects beyond the 60 million to 70
million tonnes likely to come on stream are likely to have
Developments will be forced to compete for skilled labour
and will also face higher input costs as rising gas demand for
export will boost U.S. gas prices from their current low levels.
Other prospective LNG areas, such as the east coast of
Africa, also suffer high costs, although more because of
remoteness and lack of existing infrastructure.
Political risk in Mozambique is also significantly higher
than in Australia, and project developers there may struggle to
secure financing from increasingly risk-averse bankers.
Canada is also touted as a source of big LNG volumes, but
developments there will have to overcome geographic obstacles in
the shape of the Rocky Mountains, native land title issues and
All these issues mean that Australia's LNG future isn't as
endangered as the oil and gas companies are perhaps making out.
What is clear though is that costs will at least have to be
better controlled and industry, governments and even the labour
unions will all have to try harder to get along with each other.
The most likely end result is that while these issues are
sorted out, and also while everybody waits to see if LNG demand
is going to be as strong as forecast, the timelines for project
approvals will start to slip.
The second LNG investment boom in Australia, if it happens,
will be a lot more cautious and drawn out.
(Editing by Richard Pullin)