Cost blowouts and skills shortage threaten gas projects
Release Date: 2011-01-31
THE national skilled worker shortage and costly delays mean some planned liquefied natural gas projects -- including Origin Energy's $35 billion Australia-Pacific LNG project -- could be abandoned because they will miss lucrative supply contracts, possibly costing billions of dollars in lost exports.At the same time, a projected $20bn of LNG sector cost blowouts in the next six years could further eat into government revenue, because surging costs would be offset against petroleum resource rent tax liabilities under the Gillard government's resource tax regime.
Analysis by Macquarie Equities shows a looming LNG supply surplus as soon as 2017, which means delayed LNG projects could miss the chance to sign up buyers..
"Australian project timelines cannot keep slipping, as operators run the risk of simply missing the LNG marketing window," Macquarie analyst Adrian Wood said.
While that window could widen because of Australian project delays, other nations are also trying to fill the gap.
Last year, 36 million tonnes a year of LNG capacity was targeted for project approval but only 8.5 million tonnes -- in the form of BG Group's $19bn Queensland Curtis LNG project at Gladstone -- was given the nod.
Mr Wood said Australia-Pacific LNG, which was yet to sign up a gas buyer or get government approval, could end up dropping plans for four LNG trains and instead sell its gas to BG Group or Santos, which had approved projects, or build a single production train on one of their sites.
"APLNG is clearly slipping down the development queue, and therefore arguably is more exposed to schedule slippage and cost inflation," he said. "We believe this relative positioning may encourage the joint venture to pursue alternative monetisation options."
The projects that failed to meet approval targets last year were Woodside's Pluto expansion, Santos's Gladstone LNG, APLNG, Inpex's Ichthys project and LNG Ltd's small Fisherman's Landing project at Gladstone. GLNG has been approved, but Pluto and Fisherman's Landing are struggling to find gas and Ichthys is now aiming for a decision late this year.
There have been more than $9.6bn worth of cost overruns on resource mega-projects in the past six years, with only one $2bn-plus project approved since 2000 making budget and schedule.
Skills shortages and rising costs of material have been major sources of the problems.
Macquarie says Australia's mega-projects, on average, have been 32 per cent more expensive than when approved and have been completed eight months later than expected.
Mr Wood said Woodside, Santos, Oil Search and Origin had a combined $64bn of potential capital expenditure over the next six years, compared with a combined market value of just $68bn.
"If all projects were delivered 32 per cent over budget, an additional $20bn would be needed -- a difficult task, given most funding levers have already been pulled," he said.
Julia Gillard's plans to move Queensland's coal-seam gas sector to the petroleum resource rent tax that offshore oil and gas projects operate under could soften the blow of the cost inflation by letting the government take some of the hit.
"Ironically, the move to the PRRT could turn out to be a blessing (for the companies) if cost inflation takes off as we expect," Mr Wood said.
"This is because these additional costs could then be used to offset future PRRT liabilities, leaving the government effectively sharing some of the development risk."
In 2008, federal Resources Minister Martin Ferguson said Australian LNG exports could triple to 60 million tonnes by 2015 through the $43bn Gorgon project, Woodside's Browse project, Chevron's Wheatstone, a Darwin LNG expansion, BHP's Scarborough project and the planned Gladstone projects.
Of these, only Gorgon and two Gladstone projects have been approved, while Wheatstone, Browse, Darwin LNG and Scarborough have no chance of being in production by 2015.
Illustrating the importance of LNG to Queensland, TD Securities yesterday upgraded its 2011-12 gross state product estimate from 4.5 per cent to 5 per cent on resource investment, especially in the LNG sector, and flood rebuilding.
Yesterday, Woodside showed there were still LNG buyers out there, signing a deal with Petronas to supply about 430,000 tonnes a year of LNG from the Pluto project.
The deal is to supply uncommitted cargoes from the first stage of Pluto, construction of which is nearing completion. It is in addition to the existing LNG sale and purchase agreements with foundation customers Kansai Electric and Tokyo Gas.
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