Article – Gas hits a cost wall

22 January 2014
Angela Macdonald-Smith
Australian Financial Review
“The crazy thing is that four or five years ago everyone was talking about a flood of ramp-up gas.”
–  Mark Samter, Credit Suisse
The shake-up in Australia’s burgeoning liquefied natural gas industry being wrought by Royal Dutch Shell has brought to the surface woes bubbling beneath that are threatening to upset future expansion.
Shell’s axing of at least 250 staff at its Arrow Energy coal seam gas venture in Queensland with PetroChina appears to have further dented aspirations for a rapid expansion of that state’s LNG capacity.
Coinciding with a $US1.13 billion ($1.28 billion) deal for Shell to exit Chevron’s $29 billion Wheatstone LNG project under construction in Western Australia, Shell is firmly streamlining its huge LNG portfolio in Australia, where it has warned that construction costs have become uneconomic. “Shell is very clearly taking a more cautious stance,” Mark Samter, energy analyst at CreditSuisse, says.
LNG still remains a mighty success story for Australia. Thanks to about $200 billion being sunk into seven new plants, Australia is on track to overtake Qatar as the world’s largest exporter of LNG by 2017-18.
Aside from Shell and Chevron, global majors such as ExxonMobil and Asian heavyweights such as PetroChina and CNOOC have made big commitments to LNG supply in Australia, lured by open access to reserves, proximity to Asian markets and a stable, developed economy.
LNG exports are set to surge from about 24 million tonnes last financial year to more than 80 million tonnes in 2018. Export earnings from LNG should jump five-fold to more than $60 billion, overtaking coal and iron ore. In Queensland alone, where more than $60 billion is being invested in three mega-projects, employment last year reached a new high of about 30,000 workers.
However, the boom in plant construction has had a downside: labour and engineering costs have soared.
Credit Suisse says new Australian projects cost up to $US4000 a tonne of capacity, up to five times that of existing plants. The upshot has been horrendous cost overruns at some projects – such as $US17billion for Chevron’s Gorgon.
Consultancy Energy Quest estimates the break-even cost of developing gas for the coal seam gas-based projects in Queensland has risen to between $5 and $6 a gigajoule, up from under $3 five years ago. That could put returns under pressure.
“In a way Australia made itself too attractive,” Tri-Zen International LNG consultant Tony Regan says. “We’ve seen a flood of investment in Australia a few years ago and that was before the big cost increases. Without that, costs wouldn’t have been under so much pressure with the availability of resources and overruns.”
But Shell is seen as overweight in Australian LNG. It couches its decision to sell out of Wheatstone as in line with its strategy of focusing on material stakes in LNG ventures. It owns only 6.4 percent of the project, much less than its other interests in Australia, spanning a one-sixth holding in the North West Shelf venture, a 25 percent stake in Gorgon, and 67.5 per cent of its flagship Prelude floating LNG venture among others.
Global chief executive Ben van Beurden said the Wheatstone exit showed Shell was “refocusing” investment to where it could add the most value. As a result “hard choices” were being made in Shell’s world-wide portfolio to boost capital efficiency.
Chevron has emphasised the attractiveness of the economics of its LNG projects – even Gorgon, where the budget in US dollars has risen 46 per cent. It would not comment on Shell’s exit, only welcoming the decision by existing partner Kuwait Foreign Petroleum Exploration Co to increase its stake by buying out the oil major.
Courtesy of the Australian Financial Review