Local projects hit record $49bn high

In 2004, WA Business News’s first survey of major resource and infrastructure projects identified 25 projects worth $11 billion.

That was rightly seen as an extraordinary boom and the optimists were suggesting the surge in investment activity might last five years.

Roll forward to 2007, and the annual survey has identified a record 38 major resource and infrastructure projects worth $49 billion.

The number of projects and the level of spending has risen to a level that few, if any, pundits had anticipated.

Looking at the pipeline of future projects, there is every expectation that the amount of project development will stay at least at current levels and may even increase.

The driving force behind most of the projects has been China’s enormous demand for energy and for steel-making commodities such as iron ore.

This has led to big increases in the price of most export commodities, which in turn has helped project developers cope with sharp increases in construction and materials costs.

Project developers have also learned to cope with the shortage of skilled labour in WA by bringing in foreign workers on temporary visas and sending engineering and construction work offshore.

As more people move to WA, and as the production of export commodities has risen, the state government has needed to increase its spending on roads, ports, power stations and other infrastructure.

The private sector has also ramped up its infrastructure investment, particularly in the Pilbara, where mining companies are building new ports and railways, and in the energy sector where private firms are building new power stations.

The three giants of the resources sector in WA – BHP Billiton, Rio Tinto and Woodside Petroleum – have stayed at the forefront.

BHP, the world’s biggest mining company, is involved in seven major projects in WA collectively worth $10 billion (including spending by its joint venture partners).

The WA projects comprise a big share of its global expansion plans, which include 33 projects worth $26 billion that are either under construction or in the feasibility stage.

Rio Tinto has six major projects under way in WA, with total spending of $5.7 billion.

Like at BHP, these projects make a big contribution to its global expansion.

Group chief executive Tom Albanese said last month that Rio has “an industry leading pipeline of growth opportunities with in excess of $US9 billion ($A11 billion) of committed projects”.

Woodside is involved in five major projects, either in its own right or through its role as a part-owner and operator of the North West Shelf Venture.

Its biggest undertaking is the $12 billion Pluto gas project, which constitutes the single largest investment decision ever taken in Australia.

BHP, Rio and Woodside, like many other project developers, have been hit by big cost blowouts on some of their projects (see page 23).

Big cost increases have also led to the deferral of some projects, such as Alcoa’s Wagerup alumina refinery expansion.

This is an exception. Many other project developers have re-engineered their plans to ensure they can proceed.

Project developers are also turning towards offshore procurement to try and cope with rising costs and skills shortages in WA.

Woodside, for instance, has contracted UK firm FosterWheeler to run most of the engineering design and procurement for its LNG projects from the UK.

The engineering work for Moly Mines’ Spinifex Ridge molybdenum project is largely being done by WorleyParsons’ China arm, while the engineering studies for Gindalbie Metals’ Karara iron ore project have been split between local firm Promet Engineering and Chinese partner Ansteel Mining Design Institute.

Similarly, there has been a trend towards offshore construction of process plants in modular form rather than on-site construction.

The Australian Steel Institute has expressed concern about this trend, which it says is limiting work opportunities for its members. But given the cost pressures facing industry, there seems little chance that project developers will change their approach.

Even the state government has joined the trend towards offshore modular construction, after awarding a contract for a new floating dock at the Australian Marine Complex.

Henderson company Strategic Marine was awarded the contract on the basis that fabrication of the floating dock would largely be undertaken at its shipyard in Vietnam.

The amount of work available to local industry also depends on the type of project.

Mining projects like the iron ore expansions and the Boddington gold mine involve a large amount of on-site civil engineering and construction work, which means that most of their spending goes to local contractors.

In contrast, most of the spending on offshore oil projects goes to overseas contractors.

These projects normally involve the purchase of a floating production, storage and off-take vessel and the fabrication and installation of production modules, and usually occur in shipyards in South Korea or Singapore.