Productivity, efficiency key for LNG

The decline in the oil price signals a consolidation phase for the state’s oil and gas sector.

Those in the oil and gas sector might be a little shell-shocked after the collapse in the price of oil, but in many cases the hit to revenue is simply prompting companies in the sector to act earlier than they otherwise were to cut costs.

Certainly the collapse in global oil prices, to around $US55 for Brent crude last week, has ensured that the growth in Western Australia’s LNG sector is over, for quite some time.

Realistically, however, that was already the case.

While there were hopes that Perth could become a centre of expertise for floating LNG, the truth is that there was every chance such a skill set could be as mobile as the technology it was involved in implementing.

The fact that WA was leading the FLNG push was reflective of the high cost environment here. Some of that cost was unnecessary, such as the price of maritime labour, for example, but the state hosts a leading economy in a remote, sparsely populated location, which meant it was always going to be at the higher end of the cost curve.

Given that some projects had already stalled before the oil price collapse suggests the economics of developing new processing facilities were already working against us before current market conditions prevailed.

Fortunately, the boom fuelled by cheap credit, long-term energy supply concerns, and the belief that China’s growth was unstoppable has expanded our capacity significantly. Once started, the economics of LNG must be radically altered to shut down such plant, so we have a lot of new operating LNG trains that will run for decades.

This newspaper has always believed that was the end game of the boom. Starting mines and building LNG plants is expensive, and those proposing such projects must have a very bullish view of the future.

For many in WA the boom might have been a chance to get rich quick off the back of such optimism, but the underlying strength of the state’s economy has always been steady production interspersed by occasional spurts of construction-led growth.

With the return to the status quo, WA will be a little less exciting; but the boom’s legacy means there is considerably more long-term work around than there was 10 years ago.

For those servicing the oil and gas sector, there is not just a lot more work around; these are new plants, drawing on freshly tapped fields that mean the operations and maintenance contracts will extend out for decades. That attracts businesses that have a long-term approach, arguably a better class of corporate citizen.

The lower price and earlier-than-expected focus on costs may also have other spin-off benefits.

Productivity suddenly becomes paramount.

While this means many people’s jobs are at risk and those who remain must work harder for the same returns, it also opens the door to innovators who can use their skills and experience to assist big corporates in finding smarter ways to do business.

WA’s highly educated workforce, having been at the coalface of this export-oriented global sector, is well placed to devise, develop and implement such solutions.

Specialist and innovative products that, potentially, result in huge savings to the end user typically offer the vendor big margins, and are less vulnerable to corporate cost cutting or global competition, which makes them more capable of surviving in WA’s high-cost environment.

Not all of WA can rely on such innovations but the benefit of developing as a diversified resources hub with a great lifestyle and strong education system is that creative people can feed off developments in related sectors, and have the incentives to develop new products while staying in this state.