Capex to opex challenges

The rapid development of multi-billion dollar liquefied natural gas (LNG) ventures has given rise to huge growth potential in Australia’s hydrocarbon production rates. The transition from mega project capital expenditure (capex) to operating expenditure (opex) in particular will require a whole new mindset and presents some huge challenges for industry leaders to overcome.

There are five major LNG projects currently under development, at an estimated total capital cost of US$160 billion (AU$ 149bn). International analysts GBI Research reckon these combined investments will push Australia ahead of Qatar to become the world’s biggest LNG exporter in 2017. A January 2014 report from Lux Research noted that the country looks set to become ‘the next big energy market’ for shale oil and gas, ahead of China. Research by DNV GL identified Australia as a top three investment destination for the oil and gas industry in 2014[1].

Looking at the phenomenal LNG export potential and huge economic benefits from mega projects such as the Gorgon LNG and Ichthys projects offshore Western Australia and the QGC project in Queensland, industry experts agree that this incredible rate of capex will not be sustained for much longer. They say the country must prepare to meet a ‘new normal’ in exploration and production.

Like the North Sea 40 years ago, Australia is now a hotspot for major investment seekers, but the scale and succession of projects is mammoth compared to those undertaken from Aberdeen and Stavanger.

While there may be experience of dealing with capital expenditure of US$20 or 30 million for a standard project, the move from major to mega contracts sings to the tune of US$20 billion or more Down Under.

A financial dream come true some may say, but with dreams in the oil and gas industry comes the costly, stark reality of an incredible scope of work, increased technical and logistical problems, and perhaps insurmountable risk.

Consistent and thorough communication during the capex phase of a project is key to success and is a skill the industry needs to improve on; a breakdown in negotiations could price Australia out of the market.

When broaching the transition from capex to opex of some mega projects, fundamental issues around procedures, tools and processes must be in place to support operational assets beyond short-term ambitions. Poor long-term planning halted operations soon after the construction boom in the mining industry in Australia, a setback that should provide a valuable lesson for leaders looking to capitalise on oil and gas.

With this in mind, the industry must act quickly as mega developments gather pace. Several LNG streams are projected to start coming online in 2014, such as BG Group’s QGC project (QCLNG), while Gorgon is expected to start supplying in the first quarter of 2015. However, challenges accompanying the imminent switch from mega project capex to opex may be eased by a reduced number of new projects in the pipeline. This may give the industry’s motivators and innovators valuable time to enhance the performance of projects currently in development, while keeping focused on how to resource future prospects such as the mass expansion of floating LNG technology.

Uncertainty over capex is putting pressure on project budgets and schedules, and how Australia handles the transition to opex will have huge ramifications for the industry. However, it need only look at mistakes made during development of the mining industry and the lasting legacy of the North Sea to avoid boom turning to gloom.

The LNG capex party is over

Annual capex, excluding exploration, on LNG projects probably peaked in 2013 at around AU$55 billion (US$50.9 billion) and will decline from 2014 onwards as the first few mega LNG projects near completion, economists at ANZ Research predicted in January 2014. The initial stages of the QCLNG and Gorgon projects will likely complete by the end of 2014 and the first half of 2015 respectively. Remaining projects, Prelude excluded, will probably complete by the end of 2016. “If no further LNG developments or expansions are approved, capex in this sector would decline to under AUD5bn by 2017,” ANZ Research estimated. This does not mean, however, that the Australian oil and gas industry as a whole is going to dry up.

1: "Challenging Climates: The Outlook for the oil and gas industry in 2014"

Source: Perspectives

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