Australia Takes Aim

At its foot, that is.  With a 12-bore shotgun.

I’ve written before about Australia’s muddle-headed approach to developing its oil and gas reserves which has contributed to project costs spiralling out of control.  Faced with crippling skills shortages the Australian government, bowing to pressure from powerful trades unions who are revelling in the highest wages in the global industry, refuses to relax immigration laws.  As was recently revealed:

Australia and Norway led the world in salaries paid to oil and gas workers in 2012, while skills shortages ranked among employers top concerns for the future, according to a new survey.

Australian oil and gas companies paid their employees an average of $163,600 a year in 2012, highest in the world. Norway ranked in second place worldwide on $152,600.

“Both countries have limited skilled labour pools and significant workloads,” the Hays report said. “The result is very high pay rates.”

Australia will likely end up paying a heavy price such short-term thinking, as two recent stories suggest.

The first:

ExxonMobil has confirmed that a giant floating liquefied natural gas vessel will be used to develop the deep-water Scarborough gas field off Western Australia.

The vessel will measure 495 metres in length and 75 metres in width, and have an LNG processing capacity of between 6 million and 7 million tonnes per annum — almost double the production capability of the FLNG vessel that Shell is building for the Prelude project in Australia.

The second:

Woodside Petroleum has confirmed it has pulled the plug on the current development plan for the Browse liquefied natural gas project in Western Australia.

Woodside said today it had completed its technical and commercial evaluation of the project and decided the development concept “does not meet the company’s commercial requirements for a positive final investment decision”, which was due by mid-2013.

The operator said the results of tenders for the upstream and downstream scopes “showed that the development would not deliver the required commercial returns to support a positive final investment decision”.

There have been market concerns for a long time that Browse would not be commercially viable in its current shape, and these concerns ramped up last August when Shell increased its equity in Browse.

Shell is vocal about the ultra-expensive Australian LNG market and is looking for more opportunities for its floating LNG technology.

The emphasis on the last paragraph was added by me.  For the layman, there are two options for developing Australia’s offshore gas fields: build an LNG plant onshore, or use a floating LNG facility (FLNG).  FLNG is new technology, and none is yet in operation.  Shell is leading the way in this area with their Prelude FLNG project offshore Australia, ExxonMobil is following closely, and the other majors are watching how things develop with considerable interest.  FLNG represents a far greater technological challenge, and in theory should also be more expensive.  But due to the market conditions in Australia, where skills are in short supply, strikes are common, sites are remote, materials are expensive, environmental and indigenous community consultations are lengthy, and immigration laws strict, the costs of building an LNG plant onshore are pushing project planners to adopt the FLNG concept whereby a vessel is built in Korea and simply floated into position offshore Australia.  All the hurdles one faces in doing works on Australian soil are thus avoided.

That major oil companies – even its homegrown one – are increasingly looking to an unproven technology built abroad rather than carry out standard engineering and construction works in Australia speaks volumes about how that country is set up to develop its oil and gas reserves.  The Australian government should have relaxed its immigration laws and allowed engineering and construction firms to import skilled labour 4-5 years ago, but took the short-term view that spiralling wages for a small minority of its workforce was a good thing.  Even worse, the government does not seem to have woken up to the problem even now, and instead we get politicians making up nonsense about FLNG.

A decade or two from now, Australia is going to wonder why it took careful aim and blew its own foot off.


3 thoughts on “Australia Takes Aim

  1. I can’t argue with your comments except for the following:

    Strikes: lowest level of strikes in decades!

    Construction: Sorry, greatest level of fabrication taking place offshore (China) ever.

    And a skills shortage because the industry never invested in skills development.

  2. Not all the costs are local labour, although that is my take too, some of the ultra high costs are ‘good dense engineering’. On one remote LNG project in WA, the US engineers’ head office insisted on epoxy coated steel piles, which are proven to corrode after being driven through rocky soils, instead of a specialist concrete that had been in successful, use, in worse conditions, locally, for 50 years without a mark on it. That technology would have saved over US$20M for the piles alone, not counting other at risk areas.
    So, while US$20M may be a drop in the bucket compared to massive labour costs, the total is not all from idiot Unions. But a pox on them anyway.

  3. @MJA: oh, for sure. Nobody should ever underestimate the additional costs to a project of the Client’s (or, less frequently, the engineering contractor’s) silly specifications, dithering, indecision, and raw stupidity.

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