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Australia: Over $50 Billion in New LNG Projects Aiming for Sanction

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By The Maritime Executive 2019-05-31 02:40:44

According to research by Wood Mackenzie, a second wave of LNG investments is building, and in Australia, over $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 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.

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. There is a range of pre-FID projects competing for sanction over the next 24 months from regions including North America, East Africa, Qatar, Russia and Papua New Guinea.

"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, environmental, engineering and sub-surface challenges."

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

"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, 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 $200 billion from 2019 through to 2025. 

Rodger says the industry is poised for better cost and schedule delivery because:

1.       The global spread means that local inflationary pressure, such as on manpower, which hit Australia and the U.S. in the previous cycle, will be less.

2.       Developers are being more cautious in their approach to construction, with more modularization and CAPEX phasing.

3.       Steel prices globally are expected to ease from recent highs in 2018.

4.       Bidding will be more competitive from new and existing contractors looking to secure work after the recent downturn.

5.       The wider upstream industry is not in the midst of a $100/bbl-fuelled spending boom, as with the last cycle, which will limit overall upstream inflation.