Developers can’t blame conditions for LNG overreach

Oil and gas consultancy RISC says over-optimistic development decisions rather than high labour and logistics costs are at the heart of the cost and schedule overruns being experienced at several major Australian LNG projects.

RISC Chief Executive Peter Dawson said warnings on Australian productivity and costs at last week’s LNG 18 conference in Perth masked the capex consequences of decisions made by operating companies well before ground was broken, or first pipe laid, on the mega projects around Australia.

“If high labour and logistics costs have been an issue for the LNG producers, the question that comes to mind is ‘why did the projects sign off on remote and harsh locations for these projects, as well as the accompanying EBA agreements in the first place?’ The answer in RISC’s opinion is overly optimistic assumptions by the operators of their ability to manage the challenges,” said Mr Dawson.

“In a number of cases the financial fall-out of head office decisions on project location and infrastructure duplication make the incremental cost of labour pale into insignificance.”

Mr Dawson said RISC’s analysis showed there are unique issues at each of the major LNG projects where there have been major cost and schedule blowouts.

  • The Wheatstone Project is located on a floodplain and the site had been rejected for earlier projects, while Gorgon has been developed on Barrow Island – a Class A nature reserve.
  • Pipelines from three Western Australian projects – Pluto, Wheatstone and Gorgon – cross each other on the way to shore.
  • Infrastructure collaboration at Queensland’s Curtis Island could have saved LNG producers billions of dollars. Instead there has been triplication in most project areas including land, storage and offloading requirements, utilities and upstream development;
  • The Ichthys and Prelude projects in Australia’s north are being developed using world first technology options which contributes to cost escalation.

“The initial planning and development decisions - not the pay rates for an Australian electrician or welder - have often been the issue and E&P producers have to recognise that,” said Mr Dawson.

“While LNG 18 has again sparked debate on Australia’s ability to remain cost competitive for LNG development there remain some key advantages for producers here.”

Mr Dawson said Australian projects were closer to North Asian LNG markets than their North American, Middle Eastern and eventual African competitors; while many projects sourcing gas from conventional reservoirs have a high condensate yield which enhances their competitiveness.

“Also not every construction story is a bad one, for example our analysis of the downstream performance at Curtis Island reveals that the unit cost of construction for the LNG trains rivals that being experienced in the US,” he said.

“RISC firmly believes Australian projects can meet future demand but achieving this will also require producers to plan better and embrace industry cooperation in the areas of infrastructure and gas supply.”

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