Woodside chief executive Don Voelte has warned Australians not to take the resources boom for granted or assume the resources sector would easily cope with all of the challenges facing it.
Woodside chief executive Don Voelte has warned Australians not to take the resources boom for granted or assume the resources sector would easily cope with all of the challenges facing it.
The American head of Australia’s largest oil and gas producer was unusually forthright when speaking about the issues confronting the sector at a gas industry conference in Perth last week.
These issues include, but are not confined to, the state government’s proposal to force gas producers to reserve up to 20 per cent of their gas for the domestic market.
Mr Voelte said “significant challenges are emerging, particularly for new projects”.
“And for Woodside at least, those challenges could be considered company-makers or company-breakers,” he said.
Mr Voelte said favourable market forces presented an opportunity for Australia but would not ensure success.
“As I look forward, I am worried about signals that appear to reflect a view that we in Australia are somehow insulated from global competitive forces – not just the lucky country but something even luckier than that – that the resources boom somehow will carry us through, regardless of the decisions we make now,” he said.
“Such a perspective is a sure-fire way to fail, for Australia and for Woodside”.
Mr Voelte sought to put the current boom in perspective by noting that other countries in the region, such as Brunei, Malaysia and Indonesia had outpaced Australia.
For instance, it took Brunei just nine years to convert its first gas discovery into LNG production.
In contrast, it took Australia about 17 years to go from the discovery of the North West Shelf gas fields to the start of LNG production and about 21 years to reach annual output of six million tonnes.
“In an historical context, our performance, significant though it was, can be viewed internationally as under par,” Mr Voelte said.
Woodside is working hard to reverse this trend. In particular, it is aiming to get its wholly-owned Pluto gas field, discovered in 2005, into production by 2010, which would be an industry record.
It is also aiming to get its 50 per cent-owned Browse gas field into production by 2012, to take advantage of favourable market conditions.
Mr Voelte said the extended upturn in the energy market was more than the standard commodity cycle.
There were several structural factors at work, including a shift from oil and coal towards gas and a geographic shift in supply from North America and Europe towards Africa, the Asia Pacific and Latin America.
“That said, however, the forces of supply and demand have not gone away, and if Woodside and our partners fail to get our gas to market as LNG, other suppliers across the Asia Pacific will,” he told the conference.
Mr Voelte said skills shortages and rising costs were two of the biggest challenges facing Woodside.
To illustrate this point, he said the average hourly labour rate for project labour was now 50 per cent above the 2004 best estimate.
He also estimated that contractor profit margins have escalated by about 50 per cent in recent years.
At the company’s annual general meeting in April, Mr Voelte said the cost of hiring drilling rigs had more than doubled since 2004.
The cost of hiring a deepwater, high capacity drilling rig had risen to $US500,000 a day.
Other increases included a near doubling of steel prices, a 50 per cent jump in maritime freight rates and a 30 per cent spike in fabrication costs since 2003.
These factors have combined to push up the cost of the North West Shelf venture’s train 5 expansion over the original $2 billion estimate.
Mr Voelte said another issue for the resources sector was the approvals process, which he described as a “sleeper”.
“It is hard to secure environmental and heritage approvals for new projects,” he said.
The state government has sought to speed up the approvals process for mining projects but Mr Voelte believes that shareholders, communities and even Woodside’s staff are demanding more of the company.
“Best practice and adherence to regulation are often not enough,” Mr Voelte said.
