Analysis: a game of double bluff, or an accident waiting to happen?

Who’s bluffing? Mining and oil companies claiming that Australia is becoming too costly and difficult for major new projects, or the Australian Government which says it’s a global problem. They both can’t be right.

The start yesterday of the annual conference of the Australian petroleum industries peak body, APPEA, was the latest opportunity for industry leaders to moan about costs and excessive regulation.

According to senior executives at the three-day event in Adelaide the outlook for $200 billion in liquefied natural gas developments is being dimmed by rising costs and falling profit margins.

The government’s response was to tell companies to get on with the job and stop complaining.

In effect, the government has said it does not believe what industry is saying because investment in new projects is continuing at a rapid pace.

Right now, the government is right. There have been signs of an investment slowdown, but no major planned projects, such as Woodside’s proposed Browse Basin LNG development, or BHP Billiton’s Olympic Dam expansion in South Australia has been affected, yet.

But, recent events in the coal industry could be an early warning that some projects have reached breaking point. Either they have become too difficult to operate, or the profit margin has been squeezed to the point where the capital invested is being withdrawn, and re-directed to overseas opportunities.

The first project to “break” was BHP Billiton’s Norwich Park coal mine which was closed, perhaps permanently, last week.

The second was Rio Tinto’s proposed $2 billion Mt Pleasant coal development in NSW which the company says might not proceed.

A number of issues hurt both coal projects. Costs were undoubtedly rising, with more to come in the form of the new mining and carbon taxes.

On the other side of the equation, the price of coal has been falling on world markets, especially for thermal coal which has been hit by rising U.S. exports as coal miners in that country battle falling energy prices caused by a glut of natural gas.

The same glut flowing from freshly-tapped reservoirs of gas in shale previously regarded as non-commercial is weighing on gas projects worldwide, including Australia where the LNG industry is fretting about making investment decisions with a 20-to-40 year commitment at a time when the price of the product to be produced could fall sharply.

The problem for industry is that its complaints about costs and regulatory overload are being ignored.

Earlier this month, the chief executive of Rio Tinto, Tom Albanese, met the Prime Minister, Julia Gillard, to repeat the message about rising costs and Australia’s unfriendly business environment.

His most telling comment was that some major shareholders in Rio Tinto had told him to stop investing in Australia and start returning money to them in the form of higher dividends.

Gillard dismissed Albanese saying that Rio Tinto was facing rising costs around the world.

It was that face-to-face meeting between a London-based mining company boss and the Australian Prime Minister which put a personal touch to the game of “chicken” being played by the miners and the government.

The miners are threatening to withdrawn capital and invest elsewhere. The government is saying “we dare you”.

For industry, the challenge is to make a stand and pull the plug on a high-profile project, or risk being seen as weak, and perhaps a suitable target for even higher taxes, such as widening the mineral resource rent tax to include other commodities.

Olympic Dam and Browse are two major investments that have the potential to be used as an industry statement of disquiet with Australia, because of their cost and the time required to build them before any return can be earned on the investment.

There is also another time factor at work. If either BHP Billiton or Woodside leave a final investment decision on Olympic Dam or Browse until next year they will run into the Australian electoral cycle and risk being accused of playing politics.

That’s why the next few months will see industry deliver on its threats of slowing major investments, or being rightly accused by the Australian Government of crying wolf.