Australian Gas Projects with Questionable Future

on Aug 22, 2012
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Santos (ASX:STO), a major oil & gas company operating in Australia, announced A$ 2.5bn (£1.65bn) injection into its Gladstone liquefied natural gas project (LNG). Investors were assured that the capital was required to invest in long-term infrastructure and operational expansion and not to fill a hole in general operational costs. According to chief executive David Knox, the new expenditure is not related to changes to the scope of the massive $18.5bn (£11.7bn) project, developed for the purpose of converting coal seam gas into LNG and exporting it to global markets. Mr Knox said that the newly invested funds will be used to optimise gas delivery into the two operational LNG trains and for additional drilling of about 300 onshore coal seam gas wells in Queensland.

Despite the statement of reassurance, investors quickly reacted by selling shares, which resulted in around A$600m (£397m) being cut into Santo’s market value. The main concern for shareholders will be if the company does not produce enough coal seam gas to deliver through its trains which will exacerbate the effect of the rising costs the industry is facing in Australia.

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!m[](/uploads/story/285/thumbs/pic1_inline.png)Lack of skilled labour in combination with the surge in development activity has limited the labour supply and turned Australia into one of the most expensive locations for LNG projects. In addition, the Australian dollar is strengthening, inflating the cost of wages and equipment in the country.
“I’m hoping we can get some more projects going but the costs here are getting to be very worrisome,” Ann Pickard, Shell’s Australian head, told reporters.

Analysts are sceptical if the projects in Queensland started by Gladstone, Curtis and Australia Pacific LNG will bring a return for investors of anything beyond the cost of capital. The main problem, according to specialists, is the overestimation of the flow rates from the fields. It might be necessary for thousands of additional wells to be drilled in order to fulfil the quotas. This will not only be very expensive but also complicated as conflicts with residents and farmers over the environment’s impacts are inevitable.

“While the reserves are enormous, so are the costs. Downside risks to well performance, drilling delays, competition for limited supply chain and land access are conspiring to push up costs by at least 30 per cent from initial estimates of $51bn to $70bn,” said Neil Beveridge, analyst at Bernstein Research in Hong Kong.
With six of the world’s 14 major liquid natural gas (LNG) projects currently being built in Australia, the country will certainly play a vital role in the global LNG boom and if those projects remain on schedule, Australia will overtake the US as the biggest producer of LNG by 2017. Its proximity to Asia’s energy-hungry states also gives it a competitive edge over other locations and allows investors to capitalize on LNG export opportunities.

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