Deloitte: US LNG Market Makes O&G Cost Reductions Critical

Australian gas operators need a greater understanding of the energy demand in the Asian market as well as much leaner operations if they are to remain globally competitive in the long term, according to Geoffrey Cann, Deloitte National Director for Oil and Gas.

Mr Cann, an oil and gas specialist with twenty-five years in the industry, said a recent Deloitte report demonstrated the potential impact of US gas exports on the Australian market, but reinforced that it was important for Australian companies to do their own research on the Asian energy market.

“The detailed forecasts provided in the report ‘Exporting the American Renaissance: Global impacts of LNG exports from the United States’ should signal to Australian operators that the days of Asian buyers having to pay premium gas prices are drawing to a close. Once the US LNG exports come to the global market prices in Asia are likely to fall and Australian operators will need to pursue strategies that carefully manage their capital investments and reduce their production costs if they are to remain competitive in the long term.”

Mr Cann said that most Australian LNG projects are joint ventures with long term supply contracts already locked in across Asia and, as a result, the impact of LNG competition from the US would be limited to price reductions on cargoes not under contract. However, he warned that the playing field was going to alter dramatically and local operators should be seeking their own economic modelling and research to understand the impacts.

“If Australia is going to be a competitive player in the LNG market operators need to understand their cost footprint to determine whether their operation will be a marginal one in the context of changing demand and pricing conditions.”

“At present, the Australian industry is relying on strong long term export prices in excess of $15/mBTU to cover high production costs as well as fund the capital expenditure that’s been necessary to develop and expand these LNG megaprojects.”

Mr Cann said US exporters would have a significant competitive advantage as a result of their extremely low production costs and enormous gas volumes driven by shale gas.

“The idea that Australia is an expensive place for resource companies to operate is not a new one. The findings in the Deloitte report are just the latest indicator that it is simply not sustainable to rely on robust Asian energy markets and high prices to cover the costs of doing business here.”

Instead, says Mr Cann, operators need to be implementing strategies that improve their productivity and reduce both their capital and operational expenditure if they’re going to ensure the longevity of a local LNG industry.

“Australian operators are facing a myriad of challenges in controlling their costs – including competition for workers, the cost of operating in remote regions, and a robust currency.

“However, it’s now becoming time critical that producers vigorously pursue a position of lowest cost operator to remain globally competitive through a range of activities, including paying much more attention to negotiating supplier contract prices, more off-shoring of equipment manufacture, bulk buying equipment where possible, and leveraging technology to improve worker productivity.”

Mr Cann said the Australian industry could also benefit from a fresh perspective in some areas and from working collaboratively to solve industry wide problems.

“There are some areas where competing operators can work together for the greater good. One example we’ve seen in other global hydrocarbon basins is in the areas of water management.  Companies realise that there’s no competitive advantage to be gained in being best in class in water management, and recognise there are benefits to the industry as a whole in managing the issue collaboratively.

“Another area where operators could benefit from a change in perspective would be in the management of Queensland’s coal seam gas industry where applying manufacturing approaches to their gas field operations would likely deliver improved productivity.

“Coal seam gas operations are very different to traditional gas field operations where the focus has been on successfully completing a small number of wells. Costs were not really the key competitive driver. With coal seam gas, you’re drilling hundreds of wells annually, so it makes sense to take on board the lessons of the manufacturing industry where uniform processes increase productivity. This is one of many tactics taken by the hypercompetitive shale gas industry to reduce their costs and would apply equally here in Australia.”

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LNG World News Staff, January 21, 2013; Image: Deloitte