Article – An Arrow into our High Costs

22 January 2014
Australian Financial Review
The feared scrapping of a planned $20 billion stand-alone LNG production train at Gladstone by the Shell-led Arrow Energy venture marks the final turning of the tide on the long Australian resources boom that began in 2003, only briefly interrupted by the global financial crisis.
There is still huge long-term growth for LNG, and by 2025 demand could have as much as doubled to 480 million tonnes a year. But there will also be considerable rivalry to supply it. New projects in the United States, Canada and east Africa are well placed on the cab rank and cheaper to develop than further expansion of Australian facilities. Offshore floating LNG production, which will become a major focus for Shell in Australia, is another lower-cost option that could take off very quickly.
Australia, meanwhile, has been busy pricing itself out of the picture. Consultant McKinsey concluded in 2013 that construction costs in Australia were 30 per cent higher than in North America. Industry chiefs including Chevron Australia boss Roy Krzywosinski said last year that Australia had only two years to close the cost gap or risk missing the next wave of global project developments worth up to $US150 billion ($170 billion).
Shell, for its part, has just issued its first profit warning in a decade and appears to be getting all of its bad news out at once. Australia remains at the centre of Shell’s global LNG growth plans. But, like all energy companies, it is under pressure from shareholders for better returns, and large projects where costs are rising will be very vulnerable to cancellation.
The LNG market is also changing. Over the next decade, world LNG prices will start to fall. This is a positive as one of the big forces behind the rising number of new customers for gas. But falling prices also mean that future LNG investment for those markets will be even less tolerant of the pressure on their margins from cost blowouts than they have been before. Everything is shouting that Australia must contain its costs.
Courtesy of the Australian Financial Review