SPECIAL REPORT: As the energy construction boom winds down, policy makers must get the settings right to prepare for future investment, while energy players mull the best way to allocate scarce capital.
As the energy construction boom winds down, policy makers must get the settings right to prepare for future investment, while energy players mull the best way to allocate scarce capital.
Also in our special report: structural change in the domgas market.
The start of production at some of the state’s enormous new LNG projects is tantalisingly close, although myriad delays and cost blowouts, and a low oil price, have raised doubts over the potential for new developments.
The state’s largest project, Chevron’s Gorgon, is already a year behind schedule and has recently been hit by the threat of industrial action, prompting industry leaders to call for change to the employment relations framework.
Australia’s high-cost environment is concerning the industry, too, with reports that some projects are struggling to deal with the current LNG spot price.
It has led to a squeeze on contractors and a renewed focus on innovation and technology. Asset utilisation remains a key question, with prospective players looking to use expensive existing project infrastructure, rather than new builds.
On the flipside, lower energy prices can be a boon for those in a position to take advantage of the reduced drilling and acquisition costs.
Last year, Carnarvon Petroleum made one of the largest offshore discoveries in the state for some decades, while AWE made a big onshore discovery in the Perth Basin.
Another recent success story has been Empire Oil & Gas, which has a domestic gas processing facility in the Perth Basin.
Local market
The completion of the four ongoing Western Australian LNG projects will shake up the pecking order of the state’s producers, with Woodside Petroleum, which is currently the number one at 6.6 million tonnes per annum of capacity, dropping to third spot.
It will be surpassed by Chevron, which at the completion of the Gorgon and Wheatstone projects will account for more than 15mtpa, and Shell, which holds the lion’s share of Prelude and a big chunk of Gorgon (see graphic).
Three global players are joining the local LNG market, with US company ExxonMobil, French player Total, and Japan’s Inpex making their first forays into WA.
Inpex, notably, has a share of the ConocoPhillips-run Darwin LNG, however, that is not included in the numbers because the field is located off the Northern Territory.
Woodside has a stake in the upcoming gas flow, nonetheless, after earlier this year buying Apache’s slice of Wheatstone for $US2.8 billion.
Overall it has been a delayed race, with Chevron’s 90 per cent complete Gorgon project recently subject to industrial action.
The company has said it could miss its latest target for a shipment before the end of this year, pushing out the timeline to 2016, while it struggles to complete commissioning of its first LNG train.
With the project almost finished, it was in a vulnerable position for labour negotiations and, led by three major unions, workers voted in August to take strike action to force a change in rosters.
Further industrial action was averted after Chevron signed a deal with a 5 per cent pay rise and changes to rosters.
Wheatstone could be delayed as well, due to late delivery of modules.
Inpex external affairs manager John Williams said the Ichthys project in Darwin was about three quarters done, despite a recent delay, with the company now flagging first gas for 2017.
“It’s going extremely well,” Mr Williams told Business News.
“We did recently have a change in our schedule … it’s due to just the massive size and scale of the project. There’s tremendous progress happening, we’re moving at a good pace.”
Mr Williams said about 30,000 people were working on the project globally, with 2,000 in Perth.
He said the company had a strong WA connection, being a major user of the Broome airport and seaport, and expected around $4 billion of work to be won by WA businesses in the life of the project.
Ichthys may not be Inpex’s last foray into WA, either, with the company additionally holding a stake in Shell’s Prelude.
“At the moment, we’re focused on the first WA project, but we do have quite a lot of acreage still in the Browse Basin,” Mr Williams said.
He said there would be potential for more development, which could supplement Ichthys.
“(Broadly) the challenge is to stay competitive in a high-cost environment,” Mr Williams said.
“We are competing on a global scale for capital; obviously if you’ve got a lower cost environment in other countries, that’s where the capital will flow in the future.”
To that end, Mr Williams highlighted stability on policy (particularly carbon emissions), consultation, and streamlined approvals as key targets for government to improve the nation’s competitiveness.
Australian Petroleum Production and Exploration Association chief operating officer (western region) Stedman Ellis said a study by consultants McKinsey & Co had found Australian LNG projects cost up to 30 per cent more than those in Canada.
“(Australia) needs to restore competitiveness before the next round of growth kicks off,” Mr Ellis said.
He agreed with Mr Williams that further streamlining of approvals would be one way to do that, and suggested industrial relations reform to deal with issues such as those faced by Gorgon.
“The situation with the Gorgon project, with production only months away, unions seeking to disrupt the project … that does nothing to enhance Australia’s reputation for certainty in the delivery of large projects,” Mr Ellis said. “It doesn’t encourage future investment.”
He said a solution, which had been backed by the Productivity Commission, would be to allow greenfields agreements for project construction to last the life of construction.
Red and green tape ought to be cut, too, most easily by removing regulatory and approvals duplication, he said.
Expanding the power of the environmental regulator Nopsema (the National Offshore Petroleum Safety and Environmental Management Authority) into state waters, in place of existing bureaucracies, would be a logical step, he said.
Costs
Recent reports have added fuel to calls for reform, with the International Energy Agency recently commenting that, on current prices, most LNG projects under way would be operating at a loss.
This state’s projects, according to Wood Mackenzie lead WA analyst Saul Kavonic, break-even at around $US12.50 to $US17 per million British thermal units.
The Japanese import price is currently well below $US10.
Australia had higher greenfield LNG costs than any upcoming competitor, driven by remoteness and its regulatory environment, Mr Kavonic said.
That echoes the IEA report, which shows the capital cost for Ichthys more than twice that of US shale play Sabine Pass, although Australia has a substantial transport advantage.
Mr Kavonic said the price drop wouldn’t affect projects that had been sanctioned, however, with these still to move into production.
In addition, most output is locked in for sale ahead of time.
Nonetheless, Mr Kavonic said there was a need for further focus on cost and contract management among project proponents.
That might mean increased infrastructure sharing and collaboration, of the kind flagged by the North West Shelf Venture and Hess for processing of Equus gas last year.
As fields in the North West Shelf dry up, fresh wells coming online would allow the site’s five trains to achieve much higher asset utilisation.
Woodside will be looking for similar agreements for its Pluto operation.
Oil shock
Katana Capital portfolio manager Romano Sala Tenna said one of the key changes in the global energy market in recent months was a slowdown in US shale production, which dropped from 9.6 million barrels a day in June to 9.1mbpd in early September.
There has also been a dramatic drop off in US rig usage, from around 1,900 to 850.
The noteworthy local figure, however, is the number of money managers taking short positions in South Australian-based Santos.
Santos has permits in the Carnarvon Basin, is involved in the domestic gas market, and has stakes in oil production, including the Stag field.
It has already expressed an interest in potentially selling its WA portfolio, although Mr Sala Tenna said some might be keen for Santos to follow Origin with an accelerated capital raising.
“(The Origin raising) is convincing the short sellers that, if they push hard enough for long enough, they’ll get Santos to do a capital raising and they’ll be able to cover their large short positions at a big discount,” he said.
More than 10 per cent of the capital in Santos was shorted at the time of writing, making it the 13th most shorted stock on the ASX.
By contrast, the Woodside bid for PNG LNG stakeholder Oil Search would be a slow burn, Mr Sala Tenna said.
Woodside had been working behind the scenes dealing directly with shareholders after the Oil Search board had declined the proposal.
“It’s a good transaction for Woodside … the reality is the PNG LNG assets are world class ... and have a lot of growth potential,” Mr Sala Tenna said.
New paradigm
The ultimate impact of lower energy prices starts at the top, with operators such as Chevron pledging to roughly halve its WA workforce.
The New York Stock Exchange-listed giant earlier this year reported earnings in the second quarter had fallen almost 90 per cent from the same time last year.
The company has opted to borrow to smooth its cash flow, dipping into debt to keep its dividend consistent.
Across the business, the purse strings are tight, although that seems to have encouraged the embrace of technology.
Both Woodside and Chevron recently signed big data deals, with Accenture and GE Oil & Gas respectively, which they hope will reduce costs and improve maintenance efficiency.
For GE, it was a subsea contract focused on analytics and predictive maintenance, while the Accenture contract was for the Pluto LNG facility.
The aim of such programs is to pick issues early and fix them in advance, a role traditionally requiring high-cost labour.
Maintenance company IAS Group business development manager Mike Davis said operators in the energy sector had been tightening up and reviewing service contracts.
“(The industry) is at a real tipping point at the moment,” he said.
“A lot of the existing asset owners and operators, because of the slump in oil price, are dramatically reviewing their costs.
“It’s a gradual process as people think outside the box about how they save money.”
But Mr Davis said that provided opportunities for innovative businesses, for example using composite repairs, rather than full replacement of equipment.
A big find
Included among the major energy sector developments last year was Carnarvon Petroleum’s oil find on the North West Shelf, at Phoenix South.
At that time, it was estimated to be the largest such discovery in three decades.
The best estimate for the field is now around 100mb, with a potential of more than 200mb.
Carnarvon chief executive Adrian Cook said production was still about three years off, with 22,000 square kilometres to be surveyed and 10 wells to drill.
“(The find) sort of set everything alight, and then (there was) the realisation that we had a lot of work ahead of us,” Mr Cook told Business News.
“Since then we’ve initiated a very large 2D and 3D seismic program, costing the joint venture about $52 million.”
Carnarvon’s partners include Quadrant Energy, which bought out Apache’s share this year, and JX Nippon.
Immediately on the agenda will be a neighbouring well in shallower water on the next geological structure, with the partnership eventually looking at exporting using a floating platform.
In the meantime, Mr Cook is undeterred by the oil price environment.
“It’s a great environment for costs, they’re coming down all over the place,” he said.
The company was sitting on a lot of cash, Mr Cook said, and sees opportunities.
“We’re starting to see some interesting assets being put on the market … the oil price actually staying low suits us at this point in time,” he said.
The company has bought acreage near Barrow Island, and will be looking for more.
It marks a major change in strategy for Carnarvon, Mr Cook explained, which three years ago had an eclectic portfolio including production in Thailand.
Now, it is in the midst of a transition to be a purely North West Shelf- focused player.
“In a hot market you can get away with (a diverse portfolio), in a tough market, you’ve got to ask, where’s your point of advantage?” Mr Cook said.
