Gas companies all at sea
Australia's soaring onshore labour costs in the LNG industry are forcing developers out to sea, where savings can be found
Escalating costs to build liquefied natural gas (LNG) plants on land in Australia, where energy workers earn the highest salaries in the world, are driving developers out to sea in search of billions of dollars in savings.
ExxonMobil plans to use the world's largest ship to turn gas into liquid at an offshore field, eliminating the need for investment in pipelines and port facilities. Woodside Petroleum is studying sea-based technology since ditching plans this month for an onshore plant for its Browse project.
After starting work on US$180 billion in LNG terminals on land, developers are considering about US$85 billion in floating projects to keep Australia competitive with suppliers in North America and East Africa. The floating export terminals will be built in Asian shipyards where labour costs are lower, including South Korea, the world's biggest shipbuilder after China.
"A lot of people have been saying Australian LNG is now over, it's going to be priced out of the market by US LNG exports and competition from Canada and East Africa," said Mark Greenwood, an analyst at Citigroup. "In our view, we are going to see continued investment in Australia, just a different sort."
The engineering challenges are massive. Royal Dutch Shell's Prelude vessel, vying to be the world's first floating LNG facility, will be as long as the Empire State Building and six times the weight of the largest aircraft carrier. Exxon proposes a vessel spanning 495 metres, or seven metres longer than the Shell plant.
Australian oil and gas workers earn US$163,600 a year on average, 35 per cent more than employees in the US and almost double the global average, according to a survey this year by recruiting company Hays and Oil and Gas Job Search. That compares with US$93,400 in Britain, according to the study, which analysed pay for engineers, geoscientists and related jobs.
Floating LNG may be almost 20 per cent cheaper than building a project on land for Woodside and its partners in the Browse project, including Shell. Using three offshore vessels to produce the gas would cost an estimated A$35 billion (HK$280 billion), compared with a cost of A$43 billion for a new development on land, John Hirjee a Melbourne-based analyst for Deutsche Bank, wrote in an April 12 report.
That's a cost of A$2.92 billion per million tonnes of output for a floating LNG project producing 12 million tonnes a year, compared with a cost of A$3.58 billion for a conventional plant, Hirjee said. Companies also can invest in floating LNG projects in phases rather than all at once, he said.
Global LNG demand is estimated to grow to 400 million tonnes a year by 2020 from 240 million tonnes last year, said Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein.
Of the 90 million tonnes a year of new projects that need to be approved globally in the next three years to satisfy LNG demand by the end of the decade, as much as a third of that may come from proposed floating LNG plants and expansions of onshore developments in Australia, Beveridge said.
Australia's vast gas reserves and proximity to the largest import markets in Asia have put the nation in pole position to meet burgeoning demand in Japan, China and South Korea and become the world's biggest exporter within the decade. The country has six onshore projects with long-term contracts under construction, with the first of those starting next year, in addition to the three already operating.
The resources boom in Australia has inflated costs to the point where onshore developments are becoming too expensive, while the industry also faces increasing worldwide competition.
Woodside's onshore plant would have created as many as 8,000 jobs during construction and generated as much as A$50 billion in gross domestic product, according to the company's website. The decision to scrap the proposal came a month after Australia recorded its highest unemployment rate in three years.
Three gas export projects have received permission to ship LNG from Canada's Pacific Coast, with another in the US, on the Gulf Coast, according to data compiled by Bloomberg. Eni and Anadarko Petroleum agreed last year to build the world's second-largest LNG export plant in Mozambique.
While there is "upside" for future Australian LNG projects, global competition is rising, and buyers may want to diversify their supply sources away from Australia, said Gavin Thompson, the Beijing-based head of Asia-Pacific gas and power research at Wood Mackenzie.