Investments in Australian LNG Projects Cool amid Cost Blowouts
Rigzone Looks Back: Australia was a favorite investment destination for LNG projects for foreign firms in the nineties so much so that the country will become the largest LNG exporter towards the end of this decade when several projects commence operations. Attracting the second wave of LNG investments is however a lot harder as Australia’s investment appeal has been hurt by escalating project costs and competition from other countries. Even a country as richly endowed with gas resources as Australia will have difficulties getting investors’ attention if the petroleum industry is not managed efficiently to deal with emerging challenges that arose over the past decade.
Australia may not see any more new liquefied natural gas (LNG) projects in the medium-term – perhaps with the exception of Royal Dutch Shell's Arrow LNG venture Queensland – as the issue of project delays brought on by cost blowouts has started to worry investors.
A published report by the Australia's Bureau of Resources and Energy Economics in June this year shed light on the burgeoning costs. It revealed that the Gorgon and Wheatstone projects have a capital cost of around $3 billion per million tonne of annual capacity, while the Ichthys project has a cost of $4 billion per million tonne of annual capacity. By comparison, the Angola LNG project in southern Africa has a capital cost of below $1.7 billion per million tonne of annual capacity.
Shell – which is also an investor in the Gorgon project – said Nov. 15 that when it took the final investment decision (FID) in 2009, it had projected a higher budget than the initial $37 billion projected by Chevron, and a later startup date for first gas. The oil major added that its cost estimates have been revised upwards from its FID assumptions, and that the company remains conservative on the startup date.
Shortage of Skilled Manpower a Critical Concern
Knox pointed out in his address that the key factor driving up LNG project costs is labor needs.
"Without the right people – projects ultimately experience further delay, and increased costs," Konx explained.
Competition for skilled resources is however not only confined to industry players in the LNG industry. The country's mining sector, which is also experiencing a skills shortage in the same talent field, sees companies involved in new mining projects offering attractive salaries and benefits packages for the same talent pool, Spence had observed.
Strong Local Currency, Regulatory Hurdles
Besides escalating labor costs, a strengthening Australian dollar and tighter local regulations also contribute to Australia's LNG project budget-blowouts.
Investment Decisions Turn Cautious
Amid the recent cost pressures, investing companies have adopted a decidedly cautious approach when it comes to sinking dollars into additional project developments.
Shell revealed Nov. 20 that it may delay its FID on the CSG-based Arrow LNG project, a joint venture with PetroChina forecasted to cost $20 billion. If the partners approve of the venture, Arrow LNG would be the fourth new project to be constructed on Curtis Island in Gladstone, which already hosts three LNG developments under construction.
Shell acknowledged considerable permitting, infrastructure and development bottlenecks on Curtis Island, and said that it is not rushing into an FID at present.
Meanwhile, a decision to invest in a fourth LNG production train at the Gorgon project is also met with a measured approach.
Shell stated that while there had been good exploration success around Gorgon, which could be good grounds for a fourth LNG train at the project; it will likely announce its investment decision on the project next year.
"We've not approved the front-end engineering and design (FEED) on train four at this stage; that is a decision which could come in 2013 and we are taking on the learning from the base project first," the company said in a statement.
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