Browse goes bye, bye, says Macquarie

It looks like my call that the end of the LNG boom is nigh is fast becoming conventional wisdom. From The Australian:

Macquarie analyst Adrian Wood says Australian capital expenditure on LNG projects may peak next year, with the recently approved Ichthys development increasingly likely to be the country’s last new project to move into construction.

…The blowouts mean the forecast internal rates of return for the projects have fallen from 14.9 per cent to 11.7 per cent, which, he said, “provided scant reward for the considerable development risks endured…Costs are trending higher just as buyers grow more price-sensitive…As a result, LNG project returns are seemingly being squeezed from both sides, meaning either Australian operators will have to contain local cost pressures or buyers will have to accept higher prices.”

Tim Schroeders from Pengana Capital Management said the combination of rising costs and potential falling prices did not bode well for further LNG developments.

“The disappointing cost blowouts in Australia and PNG are definitely concerning investors, as are the potential change in dynamics for LNG pricing relative to oil prices and the long-term nature of those contracts,” he said.

That’s bye, bye Browse and Arrow. If it’s true, the investment cliff facing Australia in the next few years is very steep indeed. Here’s how CBA illustrated it, in blue (but remember, “advanced” isn’t going to cut it any more):

David Llewellyn-Smith

Comments

  1. I think the top of the peak is just when Abbott gets elected. A good dose of austerity on the downslope should do wonders for the economy (and his popularity).

  2. So the good news is that we will have national saving by leaving resources in the ground for future use and have increased resource security.

    It keeps our economy more sustainable over the long term as well.
    It should also help reduce upwards pressure on the AUD and assist other sectors, by limiting the magnitude of the Dutch diseae impacts.

    It also means the dislocation of other sectors and employment in 2013/14 will not be as severe as it otherwise would have been.

    All in all it’s not a disaster to see slowing in this low employing sector of the economy.

    That is not to say it won’t have adverse effects on some companies, employees and areas and on national income, but a lot of that gross contribution goes to overseas shareholders, overseas lenders and overseas suppliers of steel and capital equipment.

    • Resources in the ground are worth nothing, compared to the mined and refined end-product. If substitutes for steel used in construction and coal used in energy become popular then the potential value of Australia’s resources decreases further.

      Dutch disease is actually good because it increases the purchasing power of everyone through a higher AUD. Some sectors will have to adjust but that doesn’t mean the economy collapses. A good example of long-term structural adjustment is manufacturing over the decades.

      • not true. just ask the OPEC nations how much their oil is worth in the ground and how they can manipulate forward curves etc via production chokes blah blah. ask gina reinhart how much her red dirt is worth in the ground or andrew forest. the list goes on and on and on. this shows a distinct lack of understanding of how to lever resources to your advantage.

        dutch disease is good. dumbest statement i have ever read on this site i think?

        • You’re telling me the crude oil is worth more in the ground than the refined product that ends up in the barrel? Read it again “Resources in the ground are worth nothing, compared to the mined and refined end-product.”

          Yes Dutch disease is what the protectionists call a booming economy with a high exchange rate.

          You can continue to cry for companies like Myer or Holden who scapegoat the AUD for their lack of innovation but most Australians realise a high AUD is nothing to fear. We’ve had an above parity AUD for 2 years now and our economy hasn’t imploded.

          Mod: play the ball not the commenter

  3. Talk to people a lot closer to the coalface than these blokes and you will get a very different view, on Browse in particular. What does a guy from Pengana know about prices the proponents are getting out of mod yards at the moment? Ummmm, nothing.