The rush to tap Australia's reserves of liquefied natural gas has gathered steam in the past year. Now for some serious growing pains.
Seven LNG projects now under construction in Australia are expected to cost 140 billion Australian dollars (US$144 billion). By 2020, Australia could produce as much as one quarter of the world's LNG—up from less than a tenth today—making it one of the world's top two producers alongside Qatar.
The price of such rapid growth will be high. Resource workers are expensive and will become more so as the market for labor remains tight. Woodside Petroleum has already seen cost overruns of US$3 billion at its giant Pluto LNG project in Western Australia, partly because of labor shortages.
The soaring Australian dollar, up 65% against the U.S. dollar since the worst of the financial crisis, is also pushing up the cost of business for resources companies.
Australia-listed Oil Search said last month the dollar's rise has pushed up the budget on its Papua New Guinea project, operated by Exxon Mobil, by US$700 million, or nearly 5%.
BernsteinResearch says the cost per ton of Australian LNG could average as much as US$4,000, compared with about US$1,000 at Apache's Kitimat project in western Canada.
For Australia's LNG projects, politics are an unwelcome obstacle. There are moves at federal and state levels that could limit gas extraction on vast tracts of land deemed critical to the country's agricultural production. That shouldn't affect existing projects, though it could temper expansion—which actually could help Australia avoid the worst labor shortages.
Meanwhile, pressure is building to get the Australian projects up and running soon.
Qatar—which produces some of the world's lowest-cost LNG—has a moratorium on further development of its gigantic North field in order to preserve its longevity. But the self-imposed ban ends in 2013. Discoveries in Africa and the Mediterranean will also affect supply in time. In China, there's more shale gas than in the U.S., according to the U.S. Energy Information Administration. That's a lot of supply, though there are questions over how quickly China can develop the resources given logistical constraints.
Still, brokerage Jefferies says at the low end of LNG demand forecasts, there could be an oversupply starting in 2015. That must be a concern for higher-cost producers. With the prospect of more, cheaper gas only a few years away, Australia's LNG producers are in a costly race against time.
