The energy industry in Australia, looking back on an era of waste and profligacy, is now preaching the gospel of thrift and collaboration as it tries to attract more investment in an age of fiscal discipline.
Firms like Royal Dutch Shell Plc are bemoaning the erosion of shareholder value from the go-it-alone mentality during the $200 billion splurge on Australian LNG projects over the past decade. Rivals Chevron Corp. and Woodside Petroleum Ltd. have proposed a massive offshore pipeline in Western Australia, which could be shared by several companies
That approach contrasts with the “spaghetti junction” of crisscrossing pipelines built in the past decade as ventures approached projects independently, according to Martin Wilkes, the managing partner at RISC Advisory, an independent oil and gas consultancy. The hand-wringing and newfound spirit of collaboration come as Australia, on the cusp of becoming the world’s biggest LNG exporter, tries to convince purse-holders in faraway headquarters to green-light more projects while investors call for more restrained spending.
Australia’s slate of recent LNG plants all went over budget
Source: Bloomberg New Energy Finance
Note: Chart doesn’t include Prelude because of lack of transparency from Shell on cost of project
“Everyone in the industry is feeling the scars from the lack of cooperation,” Graeme Bethune, a consultant with EnergyQuest, said in Adelaide. “They were quite extraordinary circumstances with $100 oil prices driving a slew of greenfield projects. I would hope that egos have been suppressed now. Boards are going to be much more critical on any bullish, go-it-alone proposals.”
Chevron proposed building a massive pipeline that would connect the Scarborough, Thebe and Exmouth fields, which lie hundreds of kilometers off the coast of northwest Australia, to the existing Wheatstone, Pluto and North West Shelf LNG plants, which sit along a 200 kilometer stretch of the coast. The plan would minimize duplication and would have superior economics over individual point-to-point concepts, Nigel Hearne, Chevron’s managing director for the country, said in a speech Tuesday at the annual conference of the Australian Petroleum Production & Exploration Association.
Woodside, which owns stakes in all three of those LNG plants and in two of the fields, supports the plan for shared infrastructure, Chief Executive Officer Peter Coleman said at the same event in Adelaide.
Collaboration along those lines was missing last decade when energy companies were planning the slate of LNG plants that have been coming online in recent years. In Queensland, three separate LNG plants built adjacent to each other shared virtually no infrastructure such as jetties and storage tanks. In northern Australia, two gas fields that are connected to each other are being developed in two separate projects, one using a floating liquefaction plant and one using a 900-kilometer (560-mile) pipeline to the shore.
And in Western Australia, gas pipelines splay out west and east from offshore fields, crisscrossing each other as they connect to four different liquefaction plants located on the mainland and an island. The developments in Western Australia and Queensland cost about $36 billion more than they would have if companies had collaborated from the beginning, according to a 2016 study by Wilkes at Perth-based RISC Advisory.
“Real collaboration happens at the start of projects,” Wilkes said in an interview Wednesday in Adelaide. “And had real collaboration occurred, you wouldn’t have the spaghetti junction on the West Coast.”
Failure to collaborate eroded shareholder value in the projects, Shell Australia Chairwoman Zoe Yujnovich said in a speech at the conference. Australian companies will have to overcome that history to convince investors to fund drilling projects needed to keep LNG plants full.
“Unless we can improve the attractiveness of our projects to investors, the specter of growing ullage in LNG trains may fast become an unmanaged reality,” she said, using an industry term for unused space in a storage tank. “And that is not a situation that will be easily recovered.”
Duplication not only hurt the companies involved, but local governments as well, as higher capital cost deductions reduce royalty and tax payments. Australia is set to reap A$800 million from taxes on LNG in fiscal year 2020, when it’s expected to be the world’s largest exporter of the fuel, according to analysis by the Tax Justice Network’s Australian office. Qatar, which will then be the second-biggest seller, will bring in the equivalent of A$26.6 billion.
Collaboration is also in vogue outside Australia as LNG projects seek to cut costs to compete for buyers spoiled for choice amid new supply from the U.S. and Australia. Separate projects in Papua New Guinea have proposed working together, and competing ventures in Mozambique will share some infrastructure.
If construction on another round of new projects doesn’t start soon, the world could face an LNG shortage as soon as the early 2020s, according to Bloomberg New Energy Finance.
“If we rewind 10 years, the original plan always should have been collaboration, but it wasn’t favored,” Saul Kavonic, an analyst with Wood Mackenzie Ltd., said in an interview. “There’s nothing like a massive shock drop in oil prices to force some really hard commercial and technical issues to the fore.”