Cost burdens start to bite

The state government has copped a lot of flak over cost increases and construction delays on its metropolitan railway expansion project, but its problems are modest compared with some of the largest resource projects being built in Western Australia.

The most spectacular budget blow out in the past year has been at BHP Billiton’s Ravensthorpe nickel project.

When the project was launched in March 2004, it was budgeted to cost $1.3 billion. Since then the budget has been revised three times and is now expected to be $2.75 billion, more than double the original estimate.

In addition, completion of the project has been delayed about nine months to early 2008.

Brisbane company Energy Developments has also been on the losing end of large cost blow-outs.

The cost of its Kimberley power project, involving the construction of several gas power stations in the north of the state, has doubled to about $310 million.

Managing director Chris Laurie said the cost increases reflected the shortages of skilled labour and accommodation in Karratha.

“As an example of the situation, the company had been obliged…to demobilise less critical staff at Karratha simply to provide beds for critical LNG commissioning staff,” Mr Laurie said earlier this year.

Rio Tinto’s Argyle diamond mine project, which is designed to extend the life of the existing open cut mining operation, suffered a severe budget blow-out this year.

The expected cost has risen by 56 per cent to $1.87 billion “reflecting the impacts of industry cost pressures in Western Australia and difficult ground conditions,” Rio chief executive Tom Albanese said in a statement.

Other big projects to suffer large cost increases include the North West Shelf Venture’s Train 5 expansion at Karratha, where costs have gone up 30 per cent, and BHP Billiton’s Stybarrow oil field development, where costs have jumped by 25 per cent.

By comparison, the budget for the New MetroRail project has experienced smaller increases.

The budget increased last month to $1.66 billion.

This was the latest of several increases and meant the budget was 10 per cent above the 2004 estimate when the final contracts were let, and 17 per cent above the original 2002 estimate.

However, the final cost could be significantly affected by legal disputes between the state government and its contractors, which include the Leighton Kumagai joint venture. 

BHP Billiton’s and Rio Tinto’s iron ore expansion projects, which many observers say have been the biggest contributors to the skills shortage and rising labour costs, have for the most part proceeded on budget and on schedule.

BHP surprised the market last month when it said group operating costs had increased by just 3.6 per cent over the past year.

“Given the current market tightness, this represents an outstanding performance,” the company said.

Rio’s Tom Albanese was more wary, stating that “we are alert to continuing industry-wide cost pressures, notably in WA and Queensland”.

He noted that Rio’s iron ore business had experienced higher contractor and transportation costs, particularly following cyclones earlier this year.

“We are putting in place measures to mitigate the future impact of costs through productivity improvements, the sharing of best practice and a review of our functional and support costs,” Mr Albanese said.

In the industrial sector, Wesfarmers’ fertiliser and chemicals arm, CSBP, has been trying to cope with cost pressures facing its $260 million ammonium nitrate plant expansion at Kwinana.

The group’s recent annual results presentation said “construction continues to be challenging” as a result of labour shortages and delays in equipment supply, arising from the volume of work currently under way and the Newcastle floods.