Woodside Petroleum’s Goodwyn A platform is seen in Sydney. Australia currently has seven LNG plants under construction. When all are completed by 2018 the nation will be the largest exporter of the super-cooled fuel.

Reuters/Perth

The Australian oil and gas industry is telling everybody that a second wave of investment in liquefied natural gas (LNG) plants is at risk unless labour and regulatory costs are cut.

The companies are unlikely to get all that they want. In fact they may not get very much at all out of the labour unions and the federal and state governments.

But it may not matter that much, because even with its high costs Australia remains one of the best places to invest the billions of dollars needed to develop a large-scale LNG project.

Australia currently has seven LNG plants under construction. When all are completed by 2018 the nation will be the largest exporter of the super-cooled fuel, overtaking Qatar.

Australia’s three operating LNG projects produce about 24.2mn tonnes of LNG, with the seven developments being built slated to boost that by another 61.8mn tonnes.

The problem for the oil and gas companies spending some $192bn on the seven plants is that costs have increased well beyond the initial budgets, while the certainty over LNG demand and pricing has eroded somewhat.

That’s not to say that current LNG projects won’t have buyers for their fuel, as the bulk of the planned output is already contracted.

However, there are still projects with a total capacity of 31.5mn tonnes which are awaiting final investment decisions, and another potential 65.8mn tonnes of expansions under consideration. It is this second wave of investment that the industry is warning is at risk.

Chevron, which is developing the $54bn Gorgon and $29bn Wheatstone projects off Western Australia, is one of the companies leading the fight against high costs.

Roy Krzywosinski, managing director of Chevron’s Australian unit, told the Australian Petroleum Production and Exploration Association conference yesterday that the “window of opportunity to turn things around isn’t a couple of years anymore, the clock is ticking.”

The heart of the issue is the high labour costs and union militancy that have driven up project costs, with Krzywosinski saying Chevron has suffered more than 1,000 “disruptive” right of access claims by unions since 2009.

Chevron, in a theme echoed by other companies building projects in Australia, wants the government to amend labour legislation to limit the rights of unions and allow for more flexible work contracts, as well as making it easier to import workers from overseas.

The companies also want lower regulatory burdens and more certainty on taxes, which have been subject to change as federal and state governments switch between the two major parties. With the conservative Liberal Party now controlling the federal government, and every state bar South Australia, it seems a good opportunity to overturn the workplace legislation put in place by the former Labour Party administration.

But Liberal Prime Minister Tony Abbott will be well aware that making the workplace less regulated, removing worker protections and trying to restrict unions played a big role in the defeat of John Howard’s Liberal government in 2007.

It seems more likely that some flexibility will be re-introduced in labour laws, but the best thing the industry can hope for from government is a lessening of red and green tape, and the scrapping of the carbon tax.

Union successes in gaining wage increases may also be over. The days where a cook can earn more than $300,000 a year working on an offshore facility are likely to come to an end. Wages were driven to among the highest in the world by the fact that building seven major projects simultaneously overwhelmed the available supply of suitable workers. But this will fade over the next few years, and resource companies are likely to become much more aggressive in negotiating contracts.

However, it’s unlikely that wages will fall dramatically, leaving Australia as an expensive place to do business, with construction costs believed to be some 40% higher than at equivalent LNG projects in the US.

The question then becomes, given that the industry is unlikely to get all it wants on the cost and regulation front, is Australia’s boom in LNG going to end in 2018, with the projects currently being planned either being scrapped or deferred indefinitely?

The first assumption that you have to make is that the estimates for LNG demand over the next decade are accurate.

By 2025 global LNG demand will be about 450mn tonnes, according to estimates by industry consultants Wood Mackenzie, with a supply shortfall of about 100mn tonnes.

This scenario offers justification to continue to develop LNG projects, but the key is going to be costs.

While the US currently enjoys a cost advantage over Australia, any new projects beyond the 60mn to 70mn tonnes likely to come on stream are likely to have higher costs.