A spate of cost over-runs at the $175 billion of liquefied natural gas projects under construction in Australia has sparked fresh warnings of poor returns and is putting new plants in doubt.
Of prime concern are the coal seam gas ventures in Queensland, where capital spending budgets have swelled by $US8 billion in total, and further blowouts are seen as inevitable. Drilling of the thousands of wells required at the three projects in Queensland is running behind schedule, forcing companies such as Santos to speed up drilling and buy gas from rivals to guarantee supplies.
Escalating costs on labour and the environment and the strong local dollar are also taking their toll, forcing up the budget for BG's Queensland venture by 36 per cent to $US20.4 billion.
Bernstein Research reckons the three projects could eventually cost $US70 billion, up from their original $US51 billion budget.
Head Asian energy analyst Neil Beveridge maintains that most will fail to cover their cost of capital.
"Australian coal bed methane promised so much, but may end up delivering little - at least for investors that is," he said.
Bernstein believes the LNG ventures have underestimated the number of wells they need to drill by up to 40 per cent and have failed to take fully into account the impact of persistent community opposition to coal seam gas.
Woodside Petroleum's experience with its $15 billion Pluto LNG project in Western Australia, which ran about a third over budget and started 16 months late, illustrates the scale of the issue. Analysts put the over-runs down to rushed early design work, driven by aggressive targets set by then CEO Don Voelte.
With seven LNG plants now being built at once, the squeeze is worse.
CLSA assumes a 25 per cent overrun at both Santos' and Origin Energy's Queensland projects. But analyst Mark Samter believes the WA projects may be at even higher risk, citing a potential $US60 billion final cost for Chevron's Gorgon venture, and the same for Woodside's Browse project, which has yet to get the go-ahead.
Origin and its partners recently sanctioned a second LNG plant at their Gladstone site, bringing the cost to $23 billion. Managing director Grant King admitted some cost pressures but said adding a second unit made the economics "very robust". He said a crude oil price of just $US50 a barrel, about half current levels, would let Origin recover its cost of capital.
John Grill, the outgoing chief executive of WorleyParsons, a major LNG engineering contractor, said his company had been forced to move some work overseas to cut costs for customers.
with Jenny Wiggins
Copyright 2012 Fairfax Media Publications Pty. Limited. All Rights Reserved.
(Originally published in the July 7, 2012, edition of Australian Financial Review.)