Under pressure

AUSTRALIA’S LNG industry appears to be caught in a perfect storm and a slew of disclosures in the last few weeks are evidence of that distress.
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Courtesy of Woodside Petroleum

Staff Reporter

Hosting more than two-thirds of LNG export projects under construction worldwide, Australia looked set to capitalise on the proximity to Asia and the projected insatiable appetite for energy in the emerging economies of China and India.

But the advantage of geography has very rapidly been lost to lack of secure gas resources, community buy-in, skills shortage, cost pressures, and bottom lines.

Many would argue that the LNG sector has become a victim of its own success. Projects have gotten approval at a rapid pace, with at least six projects getting final investment decisions in the last 18 months, and as a result Australia is home to seven mammoth LNG projects.

Even by the admission of policy makers, the CSG sector in Queensland has grown too fast and the evidence of this can be seen now.

A spate of recent announcements is indicative of the challenges for the sector. Perhaps the biggest challenge facing the sector, especially the CSG industry, is the underestimation of the number of wells that need to be drilled.

“It is something project sponsors haven’t realised,” an investment bank analyst said.

“The further you move away from ‘sweet spots’, the more rapid the decline and more wells you need.”

It is a scenario that Santos, which is leading the Gladstone LNG project, is grappling with.

Late last month, Santos announced it was bringing forward $US2.5 billion expenditure, slated to be spent after 2015. It also added 16% to its cost estimate, bringing the total cost to $18.5 billion.

By most estimates, Santos needs to shore up its resource base ahead of the start up of the GLNG in 2015, and its recent purchase of gas at oil-linked prices from Origin Energy is seen by analysts as a sign that such deals are more likely, which could erode the margins.

What also plagues the industry is the skills shortage, from demand for front line-managers to engineers. And in large part the skills shortage has led to cost blowouts for many projects.

According to a recent report by the Australian Bureau of Energy Economics, construction costs are relatively high in Australia, with the Wheatstone and Gorgon projects incurring a capital cost of around $3 billion per million tonne of annual capacity, while Inpex’s Ichthys project has a cost of $4 billion/MMtpa.

This is compared with the Angola LNG project, which is likely to come online later this year, at $1.7 billion/MMtpa.

While cost pressures are increasing resulting in lower margins, lack of community buy-in especially in Queensland, is emerging to be a big issue. While the likes of Santos have made renewed efforts to engage the communities and compensate, industry observers say that the public relations battle has been lost and engagement strategies have been reactive.

This strident opposition to CSG has had a rather knee-jerk regulatory response with both Queensland and New South Wales enacting policies to protect strategic cropping land.

While the Queensland government has introduced a strategic cropping land policy framework, banning CSG drilling in certain key areas, the NSW government requires CSG development within 2km of strategic land to be assessed by an independent expert.

All of this has made investors jittery with reports of project financing being done at higher costs. There have been reports that with all the uncertainties surrounding LNG projects, major banks have been lukewarm to lending, thereby escalating the cost of funding for the LNG players.

This article first appeared in ILN's sister publication EnergyNewsBulletin.net.