The world’s biggest energy companies have warned Australia has less than two years to fix the high cost of building big projects or risk being frozen out of a new $150 billion wave of global investment in LNG

LNG costs risk $100 billion of projects

PUBLISHED: 10 HOURS 39 MINUTES AGO | UPDATE: 0 HOUR 45 MINUTES AGO

GEMMA DALEY AND ANGELA MACDONALD-SMITH

The world’s biggest energy companies have warned Australia has less than two years to fix the high cost of building big projects or risk being frozen out of a new $150 billion wave of global investment in liquefied natural gas ­supply.

Senior executives said Australia needed to reduce the world’s most expensive labour costs, cut regulation and deliver a stable tax and political ­environment to have a chance of competing against East Africa, West Canada and the United States to fill ­­in a looming 160 million tonne annual ­global shortfall in LNG supply.

Projects hanging in the balance include Woodside Petroleum’s Browse venture, Shell and PetroChina’s Arrow project in Queensland, the Scar­borough floating plant proposed by ExxonMobil and BHP Billiton and the GDF Suez-Santos Bonaparte floating venture.“While the industry, partners and governments have together delivered more than $160 billion in committed LNG investment in Australia, another $100 billion-plus in projects hangs in the balance,” Chevron Australia managing director Roy Krzywosinski said on the sidelines of the Australian ­Petroleum Production and Exploration ­Conference in Brisbane on Sunday.

“Governments and industry must make changes now to capture this second wave of investment. There is an 18 to 24 month window in which to do so.”

APPEA chief executive David Byers said research from consultancy McKinsey, revealed on Financial Review Sunday, found that a new Australian LNG project would have a cost of supply as much as 30 per cent higher than a new Canadian or East African project.

ENVIRONMENTAL REGULATION

Mr Krzywosinski was joined by other companies including BG Group’s local subsidiary QGC, Shell and Origin to warn on the high-cost environment, which has been exacerbated by suffocating environmental regulation.

“The window of opportunity for LNG plants is open for about 18 months,” outgoing Shell country chief Ann Pickard said. “We have momentum on projects .”

The warnings follow a report from the government’s chief commodities forecaster last week that warned $352 billion in resource projects was now in jeopardy, following $150 billion being cancelled or delayed, because of high wages, increased regulation and a stubbornly high Australian dollar.

“We remain optimistic about the Australian investment environment, but it requires significant national ­leadership to improve our inter­national competitiveness including ­fiscal stability, increased productivity and industrial relations changes that focus on Australia’s long term interest,” Mr Krzywosinski said.

Companies spoke of increased union militancy on site and an uncertain ­environmental regime, which may be strengthened through an amendment to the Environment, Protection Bio­diversity and Conservation Act aimed at creating a so-called water trigger on coal seam gas and coal applications.

QGC’s LNG plant on Curtis Island is about 60 per cent complete and its first shipment is due in the fourth quarter of 2014.

Its spending on environmental approvals – now subject to 1500 ­environmental conditions – represents a significant cost to the project.

REPORT HIGHLIGHTS TAX BURDEN

The company’s environmental assessment took two years, 4000 ­meetings and resulted in a 12,000-page report, which received just 40 public submissions when it was released.

“At the end of this period of ­investment, there’ll be significant growth in state and federal revenue of up to $13 billion by the end of the ­decade,” Origin Energy chief executive Grant King said on Sunday.

“Why would we not be doing everything to make sure that this is delivered as efficiently and quickly as possible, because by far the easiest conversation to have in our country is, ‘if we’ve got more money to spend let’s have the ­conversation about how to spend it’.

“It would be overwhelmingly in our national interest to focus on making sure these projects are undertaken.”

The McKinsey report highlights the tax burden as the biggest competitive disadvantage for Australian LNG ­compared with Canadian, while poorer labour productivity and plant design also contribute.

On top of that are factors that are beyond control, such as the naturally higher productivity of shale gas wells over coal seam gas ones.

“We do have some very big hurdles in front of us in order to keep this investment wave going and deliver our ­current projects successfully,” Mr Byers said on Sunday.

On McKinsey’s calculations, the cost of getting LNG to Japan from a new coal seam gas-based project in Australia would be $US12 per million British thermal units, compared with $US9.20-$US9.50 for a Canadian venture. The cost gap is only slightly narrower for a conventional LNG project, at $US11.90 per MMBtu for an Australian venture and $US9-$US10 for a plant in Mozambique, which is set to become a major new source of LNG by the end of the decade.

ACCESS TO SKILLED WORKFORCE

Mr Byers said the industry was ­calling on both sides of politics to tackle the competitiveness issues that could be addressed.

He said that, whoever won the next election, the next Parliament needed to ensure a stable and pro-growth taxation regime and resist calls for intervention such as gas reservation measures. It also had to deliver regulation based on scientific principles and weed out duplication of “green tape.”

Also important was to ensure access to a skilled workforce, through training within Australia and through measures to access overseas workers.

In his speech to the APPEA conference, the organisation’s chairman and Santos’s chief executive David Knox will reiterate his call for industry to step up cooperation to help cut costs.

Mr Knox will call for the industry to take a concerted and collaborative approach to improving efficiency and delivering gains in productivity. He is also expected to stress the importance of collaborating, sharing infrastructure and delivering economies of scale.

Mr Knox has singled out the remote and undeveloped Browse Basin off the far north-west coast, where Shell, ­Chevron, ConocoPhillips and others own gas resources, as a location where industry would particularly benefit from ­collaboration.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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