Australia's next wave of LNG projects needs to compete to progress

According to research by Wood Mackenzie, a second wave of LNG investments is building, both in Australia and globally, and these projects need to compete to progress. In Australia, over US$50 billion worth of LNG projects are targeting final investment decision (FID) over the next three years.

These include Pluto expansion and backfill projects such as Browse, Scarborough, Barossa, Crux and Clio-Acme. Their combined capital expenditure (CAPEX) represent nearly half of Australia's forecast total upstream spend over the next five years.

 "Traditionally a high-cost location and with a recent history of big cost blowouts, Australian operators need to have confidence that this round of projects can be delivered on time and on budget, for the next wave of project sanctions to progress," said research director Angus Rodger at the APPEA conference in Brisbane.

Wood Mackenzie has a positive forecast for global LNG demand, which means new supply needs to be sanctioned. An estimated 65 million tons per annum (mmtpa) of new LNG supply will be required by 2025.

But there are a lot of projects targeting that window. From North America to East Africa, Qatar, Russia, Papua New Guinea and Australia, there is a range of pre-FID projects competing for sanction over the next 24 months.

"This has massive implications for Australia's next wave of investments. Lower costs and more brownfield developments this time round suggest Australian projects have a good chance of progressing, and of avoiding the mistakes of the last decade," said Rodger. "But this cannot be taken for granted. Many of these projects carry a multitude of joint-venture (JV), environmental, engineering and sub-surface challenges."

Australia is not unique to experiencing issues with LNG execution. Globally, the whole industry has a long history of poor project delivery. According to Wood Mackenzie, less than 10% of global LNG projects have been completed under budget, and 60% experienced delays to schedules. LNG cost overruns in the previous boom averaged 33%, with Australian projects overrunning by 40%.

"What the last cycle highlighted, particularly in Australia, is that highly complex projects in high-cost locations can produce some serious cost and schedule blowouts," said Rodger. "The inflationary pressure of multiple projects competing for scarce local resources was evident, but seems less likely to be an issue this time round given the reduced scale of investments."

However, are there wider risks? There is a global LNG boom on the cards, with almost 90 mmtpa of LNG expected to take FID over the next two years. CAPEX could hit over US$200 billion from 2019 through to 2025.

"We believe that although large systemic risks do exist, particularly within LNG EPC sector capacity, the industry is poised for better cost and schedule delivery," said Rodger. There are five key elements supporting this view:

1. The global spread means that local inflationary pressure, such as on manpower, which hit Australia and the US in the previous cycle, will be less.
2. Developers are being more cautious in their approach to construction, with more modularisation and CAPEX phasing.
3. Steel prices globally are expected to ease from recent highs in 2018.
4. We expect competitive bidding from new EPC contract entrants and existing contractors looking to secure work after the recent downturn.
5. The wider upstream industry is not in the midst of a US$100/bbl-fuelled spending boom, as with the last cycle, which will limit overall upstream inflation.

"Although the industry is showing signs of better execution, many of the Australian fields are located in remote areas, have high levels of containments and face significant JV misalignment issues. As such they do not represent slam dunks. One of the keys will be collaboration – if Australian operators can work together to reduce costs, then these investments stand a much better chance of lowering costs, competing with global portfolios and getting sanctioned," concluded Rodger.