Who would have thought that my chance meeting and drunken conversation at a wedding last weekend would prove so swiftly prophetic? It’s worth revisiting for a moment what I discussed with my serendipitous friend:
I spent Saturday night sipping beers with an oil and gas executive (who wished to remain nameless). His views on the mining boom were no different to my own. But the perspective was less macroeconomic and more operational. Basically, he reasoned, that between the dollar and rising input costs, the current LNG pipeline was a total fiction, that existing projects will be completed but on a longer time-frame than currently assumed and that all of the current projects under construction were going to weigh heavily on the firm’s return on equity for a long, long time. The next phase of the boom, in his view, was one that will prove quite costly to rest of us, which I will come back to.
His firm had significant maritime reserves but has effectively shelved all plans to develop them. They were looking instead at West Africa, the US and the Middle East, where returns were far more attractive.
This week has been entirely dominated by a news flow from LNG projects confessing massive cost blowouts and delays, first from Santos and BG and now from the mother of them all, Chevron:
Australia’s biggest ever resources development, Chevron’s Gorgon liquefied natural gas project, faces a $20 billion cost blowout to more than $60 billion because of the high dollar, union demands, high-cost local manufacturing and productivity issues.
…Chevron launched a cost review in July for the initial three-train venture on Barrow Island. The review is expected to reveal the cost surge and a potential delay to the schedule of first gas in late 2014.
Chevron has blamed the cost problems at Gorgon on foreign exchange movements since the go-ahead was given in September 2009 and on delays in construction on Barrow Island due to “weather, logistics and labour productivity”.
Blame whatever you like but I’m very unimpressed if I’m a shareholder. This level of cost blowout can’t be suddenly discovered. It can only happen if management is comprehensively pissed, figuratively or actually. As a quick aside, the AFR reports a similar outcome too for the Wiggins Island coal terminal:
Australia’s resources sector continues to be hit with cost overruns and project delays, with the latest issue surfacing at the $2.5 billion first stage of the Wiggins Island Export Terminal (WICET), whose delivery will now be delayed until March 2015, seven months behind schedule.
These LNG cost over-runs reek of a drunken investment binge: massive over-investment, hugely inflated asset prices, cheap finance on faulty ROI assumptions, labour market distortions on irrational expectations.
When was the last time you heard a story like this end well? As this comes off the negative income impacts on the economy are going to be greatly exaggerated. I can’t help wondering how long it is before one of the major projects collapses into the gutter and is carted off in an ambulance.