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ANALYSIS-Labour, financing to crimp Australia LNG projects

Thursday September 17, 2009 08:30:07 AM GMT

AUSTRALIA-LNG/ (ANALYSIS)

* Some projects may fail to get financing

* Severe labour shortage impacting all players

* Supply glut also threatens viability of some projects

* Mergers between projects likely

By Fayen Wong and Joseph Chaney

PERTH/HONG KONG, Sept 16 (Reuters) - Australia has high hopes of becoming the world's top gas supplier within a decade, but labour shortages and financing problems could stymie some of its A$200 billion worth of proposed LNG export projects.

Chevron and partners on Monday gave a formal green light to the massive 15 million tonnes per year (tpy) Gorgon LNG project in western Australia, the world's biggest new gas project, at a lower than estimated cost of A$43 billion ($37 billion).

While Gorgon will add billions to the government's coffers, it is poised to stiffen competition for workers in a country that is already struggling from a shortage of skilled labour.

Industry experts say an LNG plant with a single production unit will require around 3,000 workers, while Chevron has said that its Gorgon project would employ around 10,000 people at the peak of its construction -- prompting the government to warn of a severe skilled labour shortage around 2011.

"There are several projects on both sides of the coast rushing to reach a final investment decision this year or early next year, and when they do, there will be a real squeeze for global LNG expertise," said Richard Quin, an analyst at energy consulting firm Wood Mackenzie. "There's already a bottleneck forming."

As many as six LNG projects are rushing to be approved by 2010, including the ExxonMobil-operated LNG project in Papua New Guinea, Woodside's second train expansion for the Pluto project, and Inpex's Ichthys project in northern Australia.

Those six projects also include three coal-seam gas developments on the east coast led by Santos Ltd, BG Group and a venture between Origin Energy and ConocoPhillips.

FINANCING, CONTRACTOR CRUNCH

In addition to labour shortages, these projects also face potential financing pitfalls as bank's tighten lending policies in the wake of the financial crisis.

LNG developments proposing to use coal seam gas as feedstock -- still an untested technology -- face the toughest battle.

"First of all you need the reserves and the resources to be certified, in some cases people don't have full coverage of reserves and resources," an Australia-based natural resources investment banker told Reuters.

"Then you need to see marketing and sales contracts --- a lot of these people don't have those either. The banks will not finance these things unless they've got reserves and marketing contracts in place."

The banker was not authorised to speak publicly about the matter and declined to be named.

Issues such as the creditworthiness of buyers would also affect lenders' appetite, which potentially limits project operators from selling large portions of their output to India and China -- Asia's two fastest growing gas markets.

In a sign that the competition for contractors is also heating up, industry sources said Chevron Corp has poached staff from Woodside Petroleum Ltd's Pluto project team, which is building a trained 4.3 mtpa plant and plans to expand the project.

"If Woodside cannot sanction Pluto-2 in time or offer competitive remuneration, it could lose its experienced workforce to Gorgon, significantly impacting the Pluto-2 timeline," Deutsche Bank's John Hirjee said in a report.

"Woodside recently introduced an equity share plan to try to mitigate this risk, but we think the struggle for labour in western Australia is yet to be played out."

A forecast recovery in the commodity sector will also draw workers away from the oil and gas industry to the mining sector, analysts say. Given the challenges, the market is pulsing with rumours of mergers in order to rationalise competition.

"The general perception in the market is that there will be a merger of the ConocoPhillips Origin development with that of the Petronas Santos facility -- they're both using the same engineering contractor," the investment banker said.

The Australian government has acknowledged that a manpower shortage is the resource sector's Achilles heel. It has set up a national taskforce to train workers for the 70,000 jobs that will become available over the next decade.

With a current jobless rate of 5.8 percent, one of the lowest amongst industrialised nations, the government has also signalled that it may loosen its immigration policy to draw workers.

In a bid to cope with new orders, engineering firms such as KBR Inc, WorleyParsons and Bechtel Corp, may move their staff from other countries to help fill the gap.

"When Qatar's mega-LNG construction phase is over, these EPC contractors can then move their teams to Australia. But Australia is a high-priced labour market with strong unions, and there's also a limited number of contractors that can do the work," said Leigh Bolton, an analyst at Holmwood Consulting in London.

CROWDING OUT

Financing woes and labour shortages are compounded by the long-term fear that a supply glut will threaten the profitability of all players if too many projects are built.

Gorgon, which has already sold two-thirds of the project's annual output to key Asian buyers, has also soaked up a substantial portion of the forecast Asian demand and may crowd out competing LNG projects that are less developed.

That may threaten projects such as Woodside's Browse and Sunrise, analysts say.

"Investors should expect project delays with little prospect of capital cost deflation and the potential for a more competitive LNG pricing environment going forward," said Macquarie's energy analyst Adrian Wood. (Additional reporting by Felicia Loo in SINGAPORE; Editing by Alex Richardson) ((fayen.wong@thomsonreuters.com; +618 9456 1947; Reuters Messaging: fayen.wong.reuters.com@reuters.net))

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Oil and gas workers with LNG expertise are quite rare, Indonesia on the other hand is one of the pioneer in LNG processing. This is an opportunity for Indonesian engineers to expand their wings abroad. I believe there are a lot of Indonesian engineers more than qualified for this projects.

The downside is the financing of such projects, LNG processing is an expensive technology, high compression and cryogenic system require exotic alloy material for construction. Let's see how it goes with this multi-billion dollars projects.

Fauzi also linked alcohol to higher general crime levels and said it posed a threat to society.

“Alcohol is dangerous. If you light a fire, it can burn instantly,” he said, without elaborating.

Hmm... Did Fauzi skip his chemistry class on High school? Yes, alcohol can burn if you light a fire, but in high concentration. I don't think 20% alcohol can fuel a fire.

Furthermore, what is he trying to emphasize here, alcohol is dangerous to society because it might trigger crime or fire? I'm lost.

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