FIN Review: Threats to our LNG future

Australia was not the first mover in selling liquefied natural gas to Asia. Indonesian, Malaysian, and Middle Eastern shipments to Japan, South Korea and Taiwan were all well-established by the time Australia started exporting gas to Japan in 1989. But Australia is set to end up as the biggest player at the table. It has transformed the world’s sixth largest reserves of gas into the biggest export presence, growing from 7 per cent of the market in 2000 to 25 per cent by 2018 to displace Qatar from the top spot. Gas-based projects now make up the vast bulk of the remaining spending on the now-receding Australian resources boom. Out of $268 billion worth of resources investment still under construction, $205 billion is in energy, according to the Bureau of Resource and Energy Economics.

LNG is the most fascinating of supply chains. Billions of dollars worth of engineering in undersea wells, pipelines, giant liquefaction plants and specialised ships -just so that somebody can boil a kettle in Tokyo or Guangzhou.

Australia’s problem is that it has also made itself the most expensive builder of supply chains of this sort, and that is now threatening its future place in this crucial part of the world energy industry.

Just as with iron ore, massive investment in creating a worldscale supply industry has also pulled in huge uncontrolled costs in its wake. Some of the investment growth recorded in LNG is actually $20 billion in accumulated cost blow-outs, not extra value. Chevron Australia head Roy Krzywosinski says Australia has a window of only 18 months to two years to make itself competitive again, or risk being frozen out of the next wave of LNG development set to be worth another $150 billion.

Gross underestimates of project costs are nothing new in the global LNG world. But disturbingly, consultant McKinsey predicts that for the next round of investment, Australia is already 30 per cent more expensive than rivals, much of it for self-inflicted reasons of labour cost, tax and greentape regulation.

The Australian dollar, pushed up partly because of the resources bonanza itself, is a problem but hardly the only one. As the investment has poured in, labour productivity has not matched it, with output per dollar falling well below the US and Canada. The antics of unions such as the Maritime Union of Australia in extracting ridiculous concessions from contractors on energy projects cannot be allowed to survive into the next round of LNG investment or it might be the last. Moreover, Australia will not have the pricing power over gas supplies that it has had in the recent past to cover up indulgences on costs.

Brand new projects built from scratch onshore are already considered to be too expensive to do again. Future projects will either be expansions of existing facilities which can use existing infrastructure, or else floating plants that can be built to a standardised design and moved on to new developments later.

But if Australia wants to keep getting even such projects, it must get its house in order. No less than Shell’s global boss, Peter Voser, said on Monday getting the tick for future investment means getting tax and regulation right. New energy minister Gary Gray also conceded, given the scale of spending on LNG, “unreasonable” pay increases not linked to productivity could not go on. But the complacency of ministerial colleague Anthony Albanese in dismissing warnings on investment, and pointing to what we already have, shows some in the federal government do not get it. One of the benchmarks for any new government in Canberra after September 14 will be whether they can create the settings that will keep our LNG boom going through another cycle. There will be more competition. The Americans will have to turn to exports to justify more investment in their faltering shale gas boom. They will not be shy of a bit of gas diplomacy, and using energy supplies as extra carrots in wider trade deals that we’ll have to be sharp to match.

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