Cost "blow-outs" raise questions about Australia's LNG export drive.

FT: ….“Australia is poised to become the world’s biggest exporter with 84m tonnes of LNG capacity coming into production by about 2018,” says Rod Duke, head of LNG at Santos, an Australian energy company.”
….Energy companies have invested $200bn in Australian projects over the past decade, including three LNG plants in Gladstone operated by consortiums led by the UK’s BG Group and Australia’s Santos, and Origin Energy.
The plants are the first in the world to convert coal seam gas to LNG. BG Group’s plant is due to go into production within weeks, while the other facilities will be switched on next year.
It is the biggest building site in Australia with more than 13,000 employees toiling away over five years to construct the world’s first coal seam gas LNG plants.
But as the country prepares to overtake Qatar as the world’s biggest LNG exporter, Australia faces competition from US shale gas, a proposed pipeline between Russia and China and rising costs.
This has caused investors to press the pause button on a further $100bn-plus planned projects
as they consider which country offers the best return on LNG investments.
“We think it will be very difficult for new greenfield Australian projects to compete equally with those from the US, particularly as the buyers are now looking for lower LNG pricing,” says John Hirjee, Deutsche Bank analyst.
shale gas revolution in the US, which is forecast to see LNG production treble by 2035, is prompting companies such as Cheniere Energy and Sempra Energy to export to Asia. More than a dozen projects in Africa and Canada are also planned, which provides Asian buyers with alternative and cheaper supplies.
Deutsche says current contract prices to ship LNG from Australia to Japan are about $14-$15 per million British thermal units whereas the equivalent price of US LNG is $11.84.
Increased competition has hit Chevron’s Gorgon project in Western Australia, which is scheduled for completion in 2015. So far it has sold just 65 per cent of gas in 20-25 year long-term contracts, compared with a target of 85 per cent.
“With the degree of uncertainty that there is about US exports and the size of US exports, I think you can understand why buyers might want to wait a little bit to see how that all lands out before going forward to secure longer-term contracts,” Pat Yarrington, Chevron’s chief financial officer, said last month.
Santos says the threat posed by US shale is overblown due to huge demand growth, with LNG’s share of Asian gas supply forecast to rise from 35 per cent to 52 per cent by 2030. It questions whether US shale gas will be cheaper for Asian buyers in the long run.
“If you look at the cost of liquefying that gas and transporting it via the Panama Canal all the way across the Pacific, the actual delivered price into north Asia is not materially different from Australian projects,” says Mr Duke.
He adds that a planned pipeline supplying Russian gas to China will only meet 6 per cent of gas demand and therefore not threaten LNG exports.
The greater threat to Australia’s LNG industry is high costs, according to producers, which have incurred spending “blow outs” when building projects. For example the Gorgon project is now forecast to cost $54bn, compared with initial estimates of $37bn in 2009. Santos’ plant in Gladstone was initially set to cost $16bn and will now come in at $18.5bn.
McKinsey & Co has estimated it costs 20-30 per cent more to build projects in Australia than in the US or east Africa, due to a strong local dollar, high labour costs and the nature of its gas reserves.
Several projects are stalled, including a A$10bn (US$8.8bn) coal seam gas LNG plant in Gladstone, which is proposed by a consortium of Arrow Energy, Royal Dutch Shell and PetroChina.
“There is a lot of risk built into these projects,” says Alistair Cathcart, head of LNG at Bechtel, the US company building all three of the coal seam gas plants in Gladstone.
He says it is unlikely investment will begin flowing into greenfield projects in the near future.
….Each of the three facilities on Curtis Island uses two and half times as much concrete as the Empire State building and five times as much steel as the Eiffel Tower. A single gas storage unit is the size of a football pitch and 30m tall.”