Australia Bids to Improve Oil, Gas Investment Climate
Recovering Australia’s attraction as a premier petroleum investment destination has been on the agenda of the federal government since the beginning of this year. This became more pronounced as investors, including those currently developing projects in the country, voiced their concerns over a range of issues, including escalating costs.
A tinge of optimism returned to the petroleum industry when a market-friendly Liberal-National coalition led by Tony Abbot ousted the incumbent Labor Party from power in September. The new Prime Minister pledged to reverse some of the Labor government’s oil and gas policies.
The Australian Petroleum Production and Exploration Association (APPEA), representing the country’s petroleum industry, elaborated on the major challenge to continued growth in Australia’s oil and gas industry in a Sept. 7 publication. APPEA explained that a “high-cost local environment and the emergence of new liquefied natural gas (LNG) competitors in East Africa, North America and elsewhere make it much harder to win market share and attract investment.”
Issues Weighing on Australia’s Investment Appeal
Escalating cost has been frequently cited by existing and potential petroleum investors as a major factor dampening Australia’s ability to attract capital for new, particularly LNG, projects. The attraction of Australia as a LNG investment hub was also dampened by competition from projects overseas, while the cost of such developments locally had risen substantially over the past decade and was 20-30 percent above global competition, APPEA’s Chairman David Knox revealed in a May 27 address to the APPEA Conference & Exhibition.
Statistics provided by Australia’s Bureau of Resources and Energy Economics (BREE) in October confirmed that cost did overrun in the country’s major LNG projects. Capital expenditures on these projects, including Pluto, Gorgon, Queensland LNG, Ichthys, Gladstone LNG and Wheatstone, rose between 39 percent and 301 percent from the publicly announced stage to develop them to the committed/completed stage, according to BREE.
In the case of Gorgon LNG project off Western Australia, development expenses increased to around $54 billion (AUD 55 billion) in December 2012. Chevron Corp., the project operator, attributed the higher project cost to labor shortages, logistics challenges and the strength of the Australian dollar. Future expansion of the Gorgon project will be weighed against competing investment proposals as costs in Australia put the country’s competitiveness at risk, Chevron’s Chief Financial Officer Pat Yarrington was quoted Nov. 3 in Bloomberg News.
Similar concerns were shared by Royal Dutch Shell plc, a partner in the Chevron-operated Gorgon project.
"Rising costs have become a significant challenge for companies doing business” in Australia Shell’s CEO Peter Voser told the APPEA Conference & Exhibition in Brisbane earlier in May.
Commercial, including cost, consideration was also cited by Woodside Petroleum Ltd. for its decision to drop the Browse LNG onshore project at James Price Point in northwestern Australia.
“Unfortunately the cost escalation has been such that the total costs for Browse have resulted in the current development not being commercial," Woodside CEO Peter Coleman told analysts at Company Insight April 12, adding that the firm has also “seen an increase in both environmental and administrative compliance requirements and procedures.”
Wage pressure also contributed to cost issues weighing on Australia’s attractiveness as an LNG investment hub. The country topped the list of a worldwide survey on annual salaries for the industry. Limited skilled labor pools and significant workloads helped keep annual salaries high in Australia at $163,600, almost 35 percent higher than the $121,400 in the United States, the “Oil & Gas Global Salary Guide 2013” released in February by Hays plc and an industry partner indicated.
Industry association APPEA suggested in September that the government considered introducing a stable fiscal framework as the taxation regime over the previous five years has been disruptive. The Labor Government’s introduction of the controversial carbon tax, which is not borne by international competitors, adversely affected local petroleum producers, APPEA commented.
Carbon tax did prove to be a financial burden for Santos Ltd., one of Australia’s leading hydrocarbons producer. In August, the firm reported lower earnings for the first half of 2013, citing the carbon tax for the lower revenue. Santos paid $32.6 million (AUD 36 million) in carbon-related costs for the period as part of a total tax bill that reached $173.8 million (AUD 192 million).
Another issue that dented Australia’s appeal as an LNG investment hub is the existence of red tape and green tape. This created a duplicative and inefficient regulatory approval processes as there is an overlap between federal and state government regimes. As such, projects were unnecessarily delayed, while the increased costs did not bring about additional environmental benefit, APPEA said.
To improve regulatory efficiency, the industry association suggested accrediting offshore regulator for environmental and safety issues National Offshore Petroleum Safety and Environmental Management Authority (NOPSEMA) as the approving authority.
Post Elections Policy Changes
After its electoral success in September, the Liberal-National coalition government outlined plans to bring a degree of stability back to the Australian energy industry following over half-a-decade of Labor Party rule.
“The [Liberal-National] Coalition Government will work with the industry to restore policy certainty to the energy sector, after six years of constantly shifting goalposts and wasted opportunities for energy market reform,” Ian Macfarlane, Minister for Industry said in a speech to the Energy Users Association of Australia national conference Oct. 17 in which he also indicated that the government planned to boost productivity and lower regulatory burden for the energy sector.
“Australia’s energy sector is critical to a productive and competitive Australian economy. It is vital to job creation and encouraging ongoing investment in our industries,” Macfarlane added.
The task has become more urgent as the number of committed LNG projects in Australia are expected to drop rapidly over the next four years as a number of these multi-billion dollar projects near completion, BREE said in October.
Keeping to his pledge to repeal the carbon tax to lower energy costs for industry and households, Abbott introduced legislation during the first session of the new parliament Nov. 13. The Labor government’s carbon pricing scheme sought to cut emissions by taxing major polluters with the world's highest carbon price of $22.23 (AUD 23) a ton before moving to a market cap-and-trade system by mid-2014. Abbott intends to replace Labor’s carbon scheme with a “direct action plan” that includes an emission reduction fund and a market-based incentive for businesses to trim greenhouse emissions.
"The election was a referendum on the carbon tax … Now it's up to this parliament to show that it's listened," Australia’s Prime Minister told the lower house.
Still, the government’s repeal of the carbon tax might face likely opposition in the Senate – the upper house of the Australian parliament – where Labor, the Greens, independents and several small parties hold majority seats.
The new government also wanted to create a “one-stop-shop” for offshore petroleum activities in Australian waters. The Environment and Industry Ministries announced that they will undertake an assessment of NOPSEMA’s environmental management processes, a matter that APPEA had called on the government to review.
“The Government has prioritized this strategic assessment so that NOPSEMA’s environmental regulation can be recognized as meeting the requirements of the EPBC [Environment Protection and Biodiversity Conservation] Act without additional referral or approval required from a separate Commonwealth regulator,” MacFarlane said in the Oct. 25 joint ministerial statement with Environment Minister Greg Hunt.
“The outcome of the strategic assessment will deliver faster environmental approvals, reduce duplication in environmental assessments and regulation and promote Australian industry and protect employment while maintaining integrity of the environmental approvals process,” Hunt added.
To put its own stamp on Australia’s energy industry, the Abbott government announced Dec. 5 that it will prepare an Energy White Paper to deliver a new framework for national energy and resources policy that is clear, consistent and stable.
“A new Energy White Paper … will set out a cohesive policy to secure our long-term domestic energy needs, maintain international competitiveness and grow our export base,” Macfarlane said.
“Australia has the potential to be an energy and resources superpower, particularly in terms of LNG exports … it is important to assure investors that Australia is ‘open for business’ and to have clear and predictable policy settings,” he added.
The potential for Australia to be an energy, primarily LNG, superpower certainly exists.
“Australia’s gas production growth would see the country rival Qatar as the world’s largest exporter of LNG by 2020, but only if plans to export are realized in full,” APPEA said, citing comments from the International Energy Agency’s World Energy Outlook 2013 that was released Nov. 12.
The government appeared to have taken another step in this direction, when it approved Dec. 11 a proposal by Arrow Energy Pty Ltd. – a 50-50 joint venture between Shell and PetroChina Ltd. – to build a LNG plant on Curtis Island off Gladstone, in Queensland.
Whether or not Australia succeeds in enhancing its appeal as an LNG investment hub depends not only on measures taken by the Abbott administration, but also to some extent, the competition posed by overseas LNG projects.
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