Dealing with the new reality

Six months ago, when the iron ore industry stumbled into a slower growth trajectory, many people around Perth comforted themselves by pointing to the continued strong activity in the gas sector.

Chevron’s massive Gorgon project was powering ahead, its Wheatstone project was cranking up, smaller projects like Macedon were continuing, and there was plenty of drilling and development activity to look forward to.

This was good news for engineering firms, for construction contractors, for the office market in central Perth and many other peripheral sectors.

That thesis will hold true for a little while yet, as construction activity continues at Gorgon and Wheatstone in particular.

And looking to the longer term, the scale of the newly built liquefied natural gas (LNG) projects that will operate for 30, 40 or more years will deliver plenty of work for servicing and maintenance companies.

But what the industry will not be able to look forward to will be a large onshore development at James Price Point.

Friday’s announcement did not surprise anybody. The rapid escalation in costs right across the resources sector was clear to all and it was inevitable James Price Point would be hit.

Woodside chief executive Peter Coleman said that despite a lot of work by the project team, the onshore development was unable to deliver adequate commercial returns.

The most likely alternative is a floating LNG development. Joint venture participant Shell has strongly endorsed FLNG, though Mr Coleman has kept open other options.

Woodside has been working internally on smaller LNG plants that involve a higher degree of modularisation.

It also wants to consider piping the gas south to one of the existing LNG plants on the Burrup.

The canvassing of options reflects Mr Coleman’s methodical and systematic approach to running the business.

If FLNG is selected as the best development concept, it will add to more than half a dozen other gas projects off WA’s northern coast that are looking at the same technology.

That is on top of Shell’s Prelude FLNG project, which is already under development.

The rapid emergence of FLNG is, in one sense, a body blow for WA industry, and for construction and maintenance contractors in particular.

There won’t be thousands of construction jobs at James Price Point, nor will there be a large onshore plant that needs regular maintenance.

That is one reason why Premier Colin Barnett was so disappointed by the decision. He is also worried that none of the gas will ever make it to the domestic market.

These costs are very significant and they should serve as a big policy prompt.

If Australia wants to secure more big projects, it needs to be a more efficient and productive place to do business.

Government has a big role to play in this, in everything from the approvals process to the workplace relations regime.

But blaming it all on the Gillard government’s carbon tax, mining tax, et al, as its political opponents have done, is simplistic.

Industry also has a role to play, since it was the resources sector’s scramble for growth over the past decade that fuelled much of the unsustainable growth in costs.

A strategy that made sense for each company in isolation – maximising output growth as fast as possible – did not make sense for the industry as a whole.

Most people in the sector recognise this and its reflected in their new mindset; work smarter, in order to achieve better utilisation of existing assets, rather than throwing money and people at every problem to deliver higher output.

Working smarter and more efficiently is also the best way for contractors to maximise opportunities from the sector, whichever development options are chosen.

The important thing is that smart development strategies must still be supported. Half-a-dozen FLNG developments off WA’s northern coast is not what anybody anticipated a couple of years ago but it’s a lot better than no further LNG developments at all.