Development of the $43 billion Gorgon LNG project has been called an economy changing jobs bonanza. With a slew of other major oil and gas projects in the wings, how real are the opportunities for local business to share in the benefits?
THE numbers are huge - mind numbingly so.
With about $200 billion in major oil and gas projects now under way or planned off the Western Australian coast over the next decade, it is little wonder the politicians are salivating.
The catalyst for this new wave of exuberance has been Chevron's giant $43 billion Gorgon LNG development on Barrow Island, which was formally approved early last month.
Hailed as an economic stimulus package in its own right, state and federal politicians have been trumpeting the 10,000 jobs expected to be created by the project during construction and the $33 billion that will be spent on local goods and services over the initial 30-year life of the project.
Commenting on the significance of Gorgon in April, when the WA government granted its final environmental approvals, Premier Colin Barnett came close to emulating Bob Hawke's infamous pledge that no Australia child would be living in poverty by 1990.
“A project like Gorgon will fill up every workshop in Western Australia for years," the premier beamed.
Yet if it will take 30 years for $33 billion from Gorgon to be invested directly in the local economy, it begs a bigger question - just how much of the actual $43 billion to be spent on the up-front development will end up in local or Australian hands?
And how much work on the pipeline of multi-billion dollar gas projects lining up behind Gorgon will go to local businesses?
The reality is not quite as rosy as the premier and other politicians would have electors believe, according to key local players at a WA Business News roundtable.
Rather than providing work for every workshop, the benefits of major projects such as Gorgon for local companies will be mixed, depending on the types of services they supply.
Put bluntly, the consensus view suggests that the highest value 'top-end' work, such as plant design and fabrication, which generally accounts for a disproportionately large percentage of investment in LNG projects, will tend to head overseas.
Meanwhile, local firms that specialise in the heavy lifting and grunt work, such as construction and similar tasks that must be carried out locally, due to geography, will thrive.
The reasons are not new and have been decades in the making: cheaper offshore providers; the relative lack of specialist local expertise; the shallow local labour pool; and the risk-driven preference of multi-national project developers to stay with their existing international suppliers.
It is a point neatly summed up by Neptune Marine managing director Christian Lange, who viewed the premier's vision of a Gorgon-powered jobs nirvana filling every workshop as pure fantasy.
“That is a fictional story, it's out of the Brothers Grimm, because it's simply not possible," Mr Lange told the WA Business News roundtable. "One we don't have the expertise; two we can't compete on price; and three all the major (project developers) will automatically default to the big international service companies for certain parts because they are lower risk."
Times have changed
The high point for local content was 2004, when local firms accounted for 65 per cent of the work on the $2.6 billion Train Four LNG expansion at the Woodside Petroleum-operated North West Shelf venture.
But that was the last time 'stick-build' construction, whereby the plant is constructed piece by piece on site, was attempted at a large-scale, highly complex process plant development in WA.
Since then, modular plant fabrication methods have enabled lower cost construction yards in Asia to fabricate high-tech plant in modules which can then be shipped to site in sections and essentially bolted together, in the process saving the developer millions.
Woodside was the first to use the technique for its $2 billion Train Five expansion at the North West Shelf in 2006, and has used it again for its $12 billion Pluto project nearby.
Woodside estimates that local content percentage for the Pluto Train One, which will start production late next year, will be about 55 per cent and few observers believe Gorgon will do better than 50 per cent.
Steve Jones is chief executive of oil and gas plant specialist Plexal Group, which has carved out a lucrative niche by focusing on the enhancement, debottlenecking and upgrade of existing plant facilities, rather than greenfield fabrication.
He told the roundtable that the potential for local firms to benefit from projects such as Gorgon largely depended on the type of services they provided, and whether they were subject to competition from overseas.
“The days of stick-building plants in Australia ended with LNG (Train) Four," Mr Jones told the forum.
“If you look at Gorgon, probably 75 per cent of it is going to be done overseas. Certainly all the engineering is going to be done in the UK, and all the modules are going to be built overseas in countries that have spent the last 20 years increasing their skills.
“But if you're in infrastructure, site preparation or logistics - things that can't be exported offshore, you're going to really enjoy the next 10 years. But if it can be exported offshore, I don't see a huge amount of benefit coming into WA."
Certainly that trend is borne out by recent data.
The sudden downturn caused by the global financial crisis had a dramatic impact on project development work in the second half of 2008 and in early 2009. That was especially the case in the mining sector.
According to the Chamber of Minerals and Energy WA, the global downturn resulted in a 12 per cent drop in the number of workers directly employed in the resources sector, to 9,666 between October and June. The Australian Bureau of Statistics estimated that more than 22,000 workers in the resources sector lost their jobs in the year to the end of May.
Yet there has been a significant uplift in activity since March as the global economy has stabilised and Chinese commodities demand has recovered.
More than $5 billion in contracts have been awarded for Gorgon alone since then and expectations are for at least a further $8 billion in Gorgon contracts to be awarded before the end of the year. Over the same period, more than $2 billion in contracts haves been awarded for iron ore developments, which typically attain a much higher percentage of local content.
Yet that uplift in activity has not translated into more work for local engineers, who notionally should be the first to benefit. According to a recent survey by WA Business News, WA's 25 largest engineering firms cut their local workforce by an average of 15 per cent during the past year.
To put that into real figures, the number of engineers employed by WA's top 25 firms fell from a record 7,883 to 6,699 during the past 12 months, a net decrease of more than 1,200 workers.
Gorgon work started
A glance at the contracts that have been awarded for Gorgon to date is instructive in demonstrating where the work is flowing.
A joint venture involving Thiess, Decmil Group and Kentz has been awarded a $520 million contract to deliver a 3,300-bed village for construction workers on Barrow Island, and Compass Group Australia has secured a $150 million deal to run the village and all catering and cleaning services. Thiess has also won a $500 million contract for site preparation works on Barrow, while Toll Holdings has a $180 million contract to manage the movement of goods on the island.
Other local firms, such as Forge Group and Howard Porter, have also secured smaller contracts worth between $10 million and $20 million, to fabricate storage tanks and custom-build semi-trailers, respectively.
The biggest Gorgon contract awarded to date is a $2.7 billion tender won by the multi-national Kellog Joint Venture, which includes Perth engineer Clough. The contract is for assembly of all downstream LNG and domestic gas production, storage and offloading facilities on Barrow Island. Clough's share of the contract is estimated at $540 million. However the actual module fabrication will largely occur in construction yards in South-East Asia, and much of the desktop work will be undertaken in London.
Similarly, while an alliance led by Australia's Skilled Engineering won a $350 million contract to provide tugs, barges and landing craft, two Asian offshore servicing specialists hold a two-thirds stake in the venture. Meanwhile, Perth's Mermaid Marine will earn $100 million from Gorgon by providing space and access to its Dampier supply base.
And just because a local firm wins such work is no guarantee it will be done locally. Clough last month also won a $12 million contract for front-end engineering and design for BHP Billiton's proposed Macedon domestic gas project in the Pilbara, but said the work would be done at its Houston office, close to BHP's project team.
Meanwhile, the Australian Steel Institute has claimed local steelmakers are being shut out of Gorgon, following a switch requiring that all steel used must conform to Japanese design standards, rather than the Australian standard. Chevron attributed the change to concerns that using Australian standard steel could result in "unacceptable schedule constraints ... fabrication complexity and cost".
Local opportunities
All that, however, doesn't mean there are not opportunities for local companies.
John Sheridan, managing director of Perth-based Ausclad Group, Australia's biggest specialist plant fabricator, said a large portion of work would always have to be carried out by local operators.
“It's interesting when the oil companies quote very large numbers for the value of services that will be sourced locally over the life of the project ... (because) a lot of that has to be sourced locally anyway," he said. "You can't dig a hole for Gorgon in China, you can't pour concrete in China for Pluto.
“But one way to look at it is to take the stuff that you have to do locally ... then work out what isn't done here. Then you will see an interesting and very different metric for local content."
Mr Sheridan said Ausclad was also optimistic about the potential for Australian firms to win at least some higher value fabrication work - provided project developers lived up to their public comments about local content. Ausclad is itself bidding for some of the plant fabrication work.
“We wouldn't bid it if we knew the decision was just going to be straight on price," he said. "But there's been encouragement for us to look at it because of Gorgon's statements that they want part of it fabricated in Australia."
Mr Sheridan said an unexpected benefit of Australia's complex industrial relations regime was that it made it extremely tough for foreign companies to come into Australia and compete for labour-intensive types of work, such as construction.
“One benefit of our IR system is that it's a very high barrier to entry for foreign companies who want to be part of this," he said. "If you don't have a deep understanding of IR and the Australian workforce, you can easily fall over."
Plexal's Steve Jones said there was also enormous future opportunity for those companies with the skills to undertake the ongoing plant modification and enhancement work that inevitably occurred once new projects entered production.
Skills still an issue
However, it is clear that Australia's historical failure to develop the necessary specialist skills base to undertake the highest level, highest value work has been pivotal in the flow of work offshore.
“(Australia's) oil and gas industry has always been small relative to other offshore provinces, so the domestic human capital doesn't exist," Neptune's Christian Lange said.
“We as an industry in Australia started way too late in developing our oil and gas human capital.
‘'Short of bringing people in from offshore ... where are we going to get experienced people from?"
The potential time and cost risks associated with skills shortages was a major reason major project developers instead turned to their existing international suppliers with access to a deeper international talent pool.
“A lot of the infrastructure for subsea development resides outside of Australia, so to cope with the scale, the size and volume of some of these projects, they simply have to go offshore," he said.
David Scott, who heads recruitment specialist Integrated Group in WA, believes the signs are already pointing to a return of the critical shortage of skilled labour which had strangled WA industry in 2007, given the number of projects that will be competing for workers at the same time.
“Over the last three to four weeks, we have seen a real increase in demand for labour in some of the trades areas, so we are concerned what's going to happen in February and March next year," he said. "I believe we will have an acute shortage of labour for a period of time ... and simply getting qualified fitters, electricians, riggers, doggers and those sorts of people will be really difficult."
Southern Cross Electrical Engineering managing director Stephen Pearce said the positive impact of that looming competition for skilled workers was itself creating a window of opportunity for local firms.
Major developers now recognised that competition for skills was itself a risk to their projects, and had started working to foster local capabilities, he said.
“To manage their own risks, they need to develop local expertise in certain disciplines to make sure they have a choice of suppliers when they need them, and I'm starting to see some of that behaviour at the moment," Mr Pearce said.
“They are making a conscious effort to share the work around to make sure there is a choice as they go forward in terms of expertise and technical skills in certain disciplines."
Ausclad's John Sheridan agreed, citing Woodside's approach to construction contracts for Pluto as an example.
“On the ground, Woodside has gone out of its way to select companies that typically wouldn't have been involved for a great reason, which is to develop local capability," he said. "So instead of being beholden to one or two international companies, there is now a range, which gives them flexibility and options."
Regardless, forum participants were unanimous in believing that greater focus and incentives on training in the skills that will be in demand five years from now is absolutely critical.
And that will only be possible if industry, government and the education sector all work together.
With the Chamber of Minerals and Energy already predicting the state will need another 37,000 workers by 2014, the clock is ticking.
