Australia’s LNG sector must control costs to compete on global stage
Clustering of economic activity a channel to competitiveness
16 August 2017: Australia’s liquefied natural gas (LNG) sector must fundamentally rethink its approach and operating model if it is to compete in the global market place. Speaking at the South East Asia Australia Offshore and Onshore Conference (SEAAOC) in Darwin today, Deloitte Australia’s oil and gas leader Bernadette Cullinane discussed approaches to improving international competitiveness of the industry.
“Australia’s reputation as a high cost destination is well known globally and arguably well deserved,” Cullinane explained. “Exceptionally high costs for LNG projects in Australia are driven by the complex nature of the projects, their remote locations, environmental sensitivities and the country’s high local cost base. Construction costs and a track record of project delays have also hurt budgets and our industry’s reputation. Operating costs must also be reduced to improve the attractiveness of Australian LNG within a global commodity market.
“The key question is how Australia stacks up against rival projects overseas. Costs are much higher for some Australian LNG projects compared to other regions in the world. Qatar, the US, Russia and even West Africa and Malaysia all have much lower breakeven costs compared to Australia. Many of these overseas projects are opting for lower capital intensity supply solutions like brownfield expansions and floating LNG (FLNG). Capital investment in Australia is declining and there hasn’t been an LNG final investment decision (FID) since 2012. What happens next will be interesting.”
While the global LNG market is in oversupply, experts predict a shortage to re-emerge in the first half of the next decade, driven by strong gas demand growth from the likes of India and China.
“Given construction timescales, new LNG FIDs, such as investment in backfilling existing facilities with new sources of gas, need to be taken now,” said Cullinane. “For Australia to actively participate in the next generation of supply, something needs to happen to make the underlying project economics more attractive for developers and investors.”
According to Cullinane there are many solutions to improving Australia’s competitiveness, including:
- A need for greater collaboration – including sharing infrastructure, leveraging expertise and managing labour bottlenecks. For LNG projects to succeed, it’s critical to have operator focus and partner alignment
- Asset optimisation – focus needs to be on improving project economics via asset optimisation, productivity, efficiency and continuous improvement to sustainably reduce cost
- Lower cost project design – innovative project designs such as the modular project approach, with a staged development strategy, enables developers to reduce production costs, assembly timelines and risks, while raising production quality
- Smaller scale developments – small scale FLNG projects are cheaper to build than a land-based LNG facility with significantly shorter development timescales, allowing developers to access customer markets more quickly
- More flexible, agile operating models – operators need to have a divertible supply portfolio, a flexible shipping fleet and a global marketing team. Perhaps Australian LNG should follow the more flexible US LNG operating model of tolling and fixed liquefaction fees
- Adopting a customer-oriented approach – ability and willingness of LNG producers to offer flexibility is a critical success factor in securing future contracts
- Leveraging the power of digital – digital has a big role to play in asset performance management, helping LNG producers get more value from their assets and operate more efficiently
- Addressing the role of governments – stable, transparent regulatory regimes that minimise red tape, give producers freedom of movement and investors long-term clarity whilst avoiding interfering in the market too much are crucial.
Darwin – creating an economic cluster
Cullinane went on to recommend the formation of an industry cluster in Darwin in the Northern Territory and other geographical distributed resources hubs around Australia such as Karratha in Western Australia and Gladstone in Queensland, to create a unique model for competitiveness.
“In clusters, producing companies are co-located with their locally-based suppliers and are supported by specialised service providers, industry associations, research organisations, educational institutions and government bodies. These entities interact closely to create long-term sustainable growth,” she explained. “Studies of economic development in advanced countries have shown firms co-located in clusters are more likely to be more innovative, pay higher wages and achieve greater productivity than firms that are geographically isolated with fewer local linkages. This approach is also advocated by the NERA and METS Ignited , the industry growth centres for energy and mining equipment and technology services, respectively.
“As a geographic region, Darwin is uniquely positioned to be developed as the first of potentially several resources industry clusters in Australia. The city’s port already supports a number of industries and it is the closest to the critical South East Asian markets.
“Collaborating and working together to build a cluster ecosystem will increase synergies which in turn will promote growth. Darwin is the home to several new, world-class oil and gas facilities as well as a critical mass of firms in related industries, including transport, services, mining, agriculture, defence and tourism. All firms would stand to reap the benefits of the cluster and significantly improve competitiveness.”