Gas bonanza threatens huge project cost inflation

Cost over-runs biggest threat to Australia's gas development projects

Australia's coal-seam gas to LNG projects are now a reality, with a six-fold increase in production expected by 2020.
Australia's coal-seam gas to LNG projects are now a reality, with a six-fold increase in production expected by 2020.

Wood Mackenzie’s Head of Australasia Upstream Research, Craig McMahon, says that the Coal Seam Gas to Liquefied Natural Gas (CSG-LNG) projects have now become a reality with a six-fold increase in production expected by 2020. The challenge for investors now is the high risk of cost overruns and delays, which affect the delivery and value, along with competitiveness of Australian projects.

Demonstrating the sensitivity of economics in Australian unconventional gas plays, McMahon says, ”Based on today’s budgets and planned timescales, a 10%-30% cost overrun would devalue a project from between 16%-47%. Without cost overruns, a one-year delay would lead to a loss in value of a quarter. If both a one-year delay and cost overruns of between 10-30% occur, the project value would decline by 43%-78%."

As of now, over US$70 billion (bn) has already been committed to existing projects in Queensland alone. With this scale of investment, Wood Mackenzie says the growth in drilling targets and the LNG capacity required to meet targets will be a challenge.

McMahon says “Looking at the Queensland projects alone, in order to deliver as planned, over 4000 wells need to be drilled by 2015. This compares to some 450 CSG wells in 2010. Also, in order to deliver LNG capacity on schedule, Queensland will have to see a remarkable growth of 33 million tons per annum (mmtpa) from 2014-2020.“

“With such hefty expansion plans, Queensland will be faced with human resource limitations as well as other inflationary factors. Competition for labour resources will come from conventional gas projects, mining sector projects and a requirement for manpower to rebuild the state post Queensland floods in early 2011.”

Cost inflation would inhibit Australia’s competitiveness as it faces greater international competition from other potential LNG exporters such as US Gulf Coast and Canada West Coast. Despite this, Australian CSG will still remain a major focus for investors with sufficient market opportunities and the emergence of developing unconventional basins.

McMahon says, “There were many sceptics who were unsure if CSG production was viable, particularly given the massive investments required. The fact that Australia is already producing 670 millions of cubic feet per day (mmcfd) demonstrates the proven materiality of Australian CSG plays. With emerging unconventional basins not yet accounted for, Australia’s unconventional gas industry still presents opportunities for investors, albeit challenges to the delivery of projects will affect the commercial value.”

 

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