Alumina and petrochemicals are set to join the iron ore and oil and gas industries as major drivers of the state’s extraordinary investment boom, WA Business News’annual major projects review has found.
Alumina producers Alcoa and Worsley Alumina are expected to commence massive expansion projects next year involving total spending of $2.4 billion and employing 2,600 construction workers at their peak.
The petrochemical sector is not as big but Wesfarmers subsidiary CSBP is expected to lead off several substantial projects (see below).
The new projects are in addition to the unprecedented level of activity currently under way in the oil and gas and iron ore sectors.
The scale of the investment boom in Western Australia is highlighted by the following key facts.
• In the past 12 months, nine projects worth $4.5 billion have been completed or commissioned (see table, page 13).
• A further 16 projects worth more than $7 billion are ongoing. These include Rio Tinto Iron Ore’s $2 billion expansion, Woodside’s $1.5 billion Enfield oil project, and BHP Billiton’s $1.35 billion Ravensthorpe nickel project.
• Eleven projects worth $5.6 billion have been given formal go-ahead in the past 12 months. These include the North West Shelf venture’s $2 billion train 5 expansion, BHP Billiton Iron Ore’s $750 million rapid growth project, and Dampier Bunbury Pipeline’s $430 million upgrade of its self-named pipeline.
The most extraordinary feature of the current investment boom is the number and scale of the upcoming projects.
A widely-quoted report by Canberra consulting firm Access Economics has added up all of the potential WA projects, including in social infrastructure and commercial building.
It concluded that WA projects “under consideration” were worth $40.2 billion, while “possible” WA projects were worth a further $42.9 billion.
In the resources sector alone, WA Business News has identified potential future projects worth $50 billion (see table, page 15).
The reality is that not all of these projects will proceed.
The iron ore industry, in particular, is home to at least seven small to mid-sized companies hoping to share in the current boom (see page 12).
Finding customers for their product is the easy bit; a much harder task is putting in place the infrastructure and finding the skilled labour and equipment needed to develop their projects.
The shortages have fed through to big cost increases for a wide range of projects.
In the gold industry, higher costs have sounded the death knell of some projects, but in other sectors, where commodity prices are booming, producers have simply paid the extra costs.
The scale of the cost increases will become clearer later this month, when BHP Billiton is expected to report a big cost blowout at its Ravensthorpe nickel project, which had an original budget of $US1.05 billion ($A1.35 billion).
Project developers have also changed their approach to construction and procurement to suit the prevailing market conditions.
A prime example is the Woodside-operated North West Shelf venture.
For its train 4 project, the engineering was done in Perth, the plant was largely built on-site and Australian content was an impressive 66 per cent.
For its current train 5 project, the engineering is being done in Reading in the UK, the plant will be built in pre-assembled modules (probably in Asia) and the Australian context is expected to fall to about 45 per cent.
A fascinating aspect of the mammoth investment projects in WA is the large amount of money that is spent before the projects even proceed.
Rio Tinto subsidiary Argyle Diamonds, for instance, is spending $100 million on exploratory declines and feasibility studies for its possible underground expansion.
Argyle’s current open-pit mine is due to stop operating in 2008 and Rio and the State Government are exploring ways of keeping the project running longer.
This includes negotiations over royalties and other charges.
Argyle’s latest proposal is for a staged underground development, and it will be seeking final approval from Rio’s board for the $1 billion expansion in December.
The amount spent evaluating the expansion, and the importance of Argyle to the regional economy, give the company and the Government strong incentives to ensure the project proceeds.
The Greater Gorgon LNG project is spending even more money evaluating the project before making a final investment decision in mid 2006.
It will be awarding front-end engineering contracts worth more than $100 million to progress the project, which is still officially budgeted to cost $11 billion, although that figure is likely to be much higher given the general increase in construction costs.
When a project reaches the front-end engineering phase it is often assumed the project is certain to proceed.
Woodside’s experience with its Blacktip gas project in the Timor Sea shows this is not always the case.
Front-end engineering for Blacktip had been completed and gas sales agreements had been signed, but the project was scrapped in May when Woodside decided the returns were not economic.
Conversely, work on Woodside’s 100 per cent-owned Pluto LNG project has progressed unusually quickly.
The field was only discovered in April yet Woodside has already allocated $65 million for development and marketing and is talking up the prospects of the $5 billion project.
Another feature of the big projects is their employment boost.
The $1.5 billion expansion of Alcoa’s Wagerup alumina refinery – which is going through final environmental approvals - will have a peak construction workforce of 1,600 people.
Just down the road, BHP Billiton subsidiary Worsley Alumina expects to employ up to 1,000 construction workers during the $900 million expansion of its refinery.
The North West Shelf venture expects to employ up to 1,500 people on its train 5 expansion. That’s an impressive number, but it’s a lot less than the 2,400 people employed on train 4.
Iron ore projects, which involve a large amount of civil engineering work, such as construction of railways and port facilities, are also big employers. In contrast, projects like power stations and desalination plants are much more capital intensive and therefore make a relatively small contribution to jobs.
