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Deloitte: Australia’s LNG sector must control costs

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Hydrocarbon Engineering,

Australia’s LNG sector must rethink its approach and operating model if it is to compete in the global market place, according to Deloitte’s Australian oil and gas leader.

Speaking at the South East Asia Australia Offshore and Onshore Conference (SEAAOC) in Darwin, Australia, Bernadette Cullinane said: “Australia’s reputation as a high cost destination is well known globally and arguably well deserved […] Exceptionally high costs for LNG projects in Australia are driven by the complex nature of the projects, their remote locations, environmental sensitivities and the country’s high local cost base. Construction costs and a track record of project delays have also hurt budgets and our industry’s reputation. Operating costs must also be reduced to improve the attractiveness of Australian LNG within a global commodity market.

“The key question is how Australia stacks up against rival projects overseas. Costs are much higher for some Australian LNG projects compared to other regions in the world. Qatar, the US, Russia and even West Africa and Malaysia all have much lower breakeven costs compared to Australia. Many of these overseas projects are opting for lower capital intensity supply solutions like brownfield expansions and floating LNG (FLNG). Capital investment in Australia is declining and there hasn’t been an LNG final investment decision (FID) since 2012. What happens next will be interesting.

“Given construction timescales, new LNG FIDs, such as investment in backfilling existing facilities with new sources of gas, need to be taken now […] For Australia to actively participate in the next generation of supply, something needs to happen to make the underlying project economics more attractive for developers and investors.”

Cullinane offered a number of solutions to help improve Australia’s competitiveness, including greater collaboration, asset optimization, lower cost project design, smaller scale developments, more flexible, agile operating models, adopting a customer-oriented approach, leveraging the power of digital, and addressing the role of governments.

Cullinane also recommend the formation of an industry cluster in Darwin in the Northern Territory and other geographical distributed resources hubs around Australia such as Karratha in Western Australia and Gladstone in Queensland, to create a unique model for competitiveness.

She said: “In clusters, producing companies are co-located with their locally-based suppliers and are supported by specialised service providers, industry associations, research organisations, educational institutions and government bodies. These entities interact closely to create long-term sustainable growth […] Studies of economic development in advanced countries have shown firms co-located in clusters are more likely to be more innovative, pay higher wages and achieve greater productivity than firms that are geographically isolated with fewer local linkages. This approach is also advocated by the NERA and METS Ignited, the industry growth centres for energy and mining equipment and technology services, respectively.

“As a geographic region, Darwin is uniquely positioned to be developed as the first of potentially several resources industry clusters in Australia. The city’s port already supports a number of industries and it is the closest to the critical South East Asian markets.

“Collaborating and working together to build a cluster ecosystem will increase synergies which in turn will promote growth. Darwin is the home to several new, world-class oil and gas facilities as well as a critical mass of firms in related industries, including transport, services, mining, agriculture, defence and tourism. All firms would stand to reap the benefits of the cluster and significantly improve competitiveness.”

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