Korea’s Australian mining boom

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There’s an interesting story today from Bloomie via the SMH that offers some staggering statistics on Floating LNG (FLNG):

The engineering challenges are massive. Shell’s Prelude vessel, vying to be the first floating LNG facility in the world, will be as long as the Empire State Building and six times the weight of the largest aircraft carrier.

Exxon proposes a vessel spanning 495 meters, or 7 meters longer than the Shell plant.

Australian oil and gas workers earn about $160,000 a year on average, 35 per cent more than employees in the US and almost double the global average, according to a survey this year by recruiting company Hays Plc and Oil and Gas Job Search. That compares with $90,000 in the UK, according to the study, which analysed pay for engineers, geoscientists and related jobs.

Floating LNG may be almost 20 per cent cheaper than building a project on land for Woodside and its partners in the Browse project, including Shell.

Using three offshore vessels to produce the gas would cost an estimated $35 billion, compared with a cost of $43 billion for a new development on land, John Hirjee an analyst for Deutsche Bank, wrote in an April 12 report.

That’s a cost of $2.92 billion per million metric tonnes of output for a floating LNG project producing 12 million tons a year, compared with a cost of $3.58 billion for a conventional plant, Hirjee said.

Companies also can invest in floating LNG projects in phases rather than all at once, he said.

Impressive certainly, but the bad news is:

The resources boom in Australia has inflated costs to the point where onshore developments are becoming too expensive, while the industry also faces increasing global competition.

Woodside’s onshore plant would have created as many as 8000 jobs during construction and generated as much as $50 billion in gross domestic product, according to the company’s website.

Shell, Europe’s largest oil company, is building the Prelude vessel at Samsung Heavy Industries’ shipyard in Geoje, an island off the south-east coast of South Korea. At the peak of construction, the venture will employ 5000 people.

Yes, FLNG is Korea’s Australian mining boom. We will of course see some profits and tax receipts via the Petroleum Resource Rent Tax but the real economic activity goes elsewhere.

It’s the job of business to maximise profits so nothing wrong with that. We might of course wonder about the management of the boom that has made us so uncompetitive in everything but the raw material…

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Comments

  1. What’s incredible is that something so enormous will float.

    Here’s hoping they use proper blow out preventers because you can guarantee, a cyclone will threaten it at some point.

  2. “It’s the job of business to maximise profits so nothing wrong with that. We might of course wonder about the management of the boom that has made us so uncompetitive in everything but the raw material…”

    Otherwise expressed: undesirable to do business with in just about everyway, such that we get reluctant business…

    And what about when other “good” options are found, eh? Hmmm.

    • GunnamattaMEMBER

      So given our real estate and labour costs (inter alia)….

      ….we are exporting mining infrastructure jobs-expertise, skills, much of the value adding of the mining boom.

      Elsewhere we are selling of another large company in a sector which Australia is relatively competitive at – http://www.theage.com.au/business/graincorp-bows-to-28b-takeover-bid-20130426-2iidj.html

      (I dont have a problem with foreigners owning Australian companies – but do wonder if they are more or less likely to want to undertake any value adding in Australia, and would ask myself that if Australians dont own much of the industries they are actually competitive at then what actually do they own apart from the most expensive real estate on earth, are we accumulating assets overseas somewhere)

      What is it we are going to tell our kids they can do to make a crust again?

      • “What is it we are going to tell our kids they can do to make a crust again?”

        Why, work in our Public Service of course. That has been the Euro solution- top up incomes from the public purse.

        While wages are obviously a big cost component of any project, there are others. Green tape , compliance costs, Indiginous/native title issues, Local ,State and Federal taxes, a whole swathe of regualtory and workplace compliance costs…. these all share in adding to project cost burdens. Not to mention the AUD of course.

        It’s too easy just to finger the resource companies alone for exporting the value add of the investment.

  3. innocent bystander

    maybe Barnett should endorse Woodside going FLNG on the proviso the “rig” is built at Kwinana – we could do with another industry besides “houses” 😉

  4. Why not a JV between WPL/Shell and Aust govt for a land based Browse project?

    Conditions: Aust Govt (via selling 10 year bonds to super funds) provides 50% of the funds, but restricts export licenses to say, 20% of output?

    I can only see winners all round:

    *taxpayers get cheaper gas due to export restriction ala USA
    *businesses get cheaper gas – lower input costs
    *jobs created
    *super funds get steady returns plus more liquid bond market instead of just buying bank stocks
    *opens ideas to create this JV system elsewhere, and particularly across the cycle

    What have I missed apart from the usual paranoia about “all government debt is bad debt (apart from bailing out banks)”?

    • That’s Barnetts issue.
      He despises FLNG.
      And there is an issue with domestic gas reserves n supply in WA. The Varanus island cock up proved that.

      He orta start thinking outside the box vis a vis bond financing.

    • DodgydamoMEMBER

      Forgetting: Probable cost blowout/IR rollover due to government involvement (e.g. Victorian desal).
      I agree with your sentiment because it appalls me that we as Australians fail to value add any of this mining output but I suspect its all about IR (see reusachtige’s point below)

    • Are you suggesting the Government simply issues debt to fund half the project? Assuming $45bn project spend, this would add about 10% to total Federal Government debt levels. And a lot of risk to the Govt balance sheet.

      • Ben – BFD. Respectfully…

        Compare that amount at-risk (invested in an income producing asset that helps reduce costs for businesses and households) compared to the trillion dollar mortgage debt at-risk (these are effectively off balance sheet debt for the government, re: Ireland), which provides only a consumption good – and at a very high expense.

        I know what Id rather my taxes covering the “risk” for…

        • Chris, I’m not making any comment on comparative use of the Govt balance sheet (implied or otherwise). Of course we would all prefer productive use of debt consistent with longer term national best interest. But, we read elsewhere on these pages of the importance of preserving our AAA rating. So the impact on this and our broader cost of debt should be considered.

          But let’s put that to one side for a moment, as it wasn’t the purpose of my comment, which was for you to answer the question – what exactly are you proposing? Are you proposing the use of conventional Government debt / a new, more project-linked form of debt / something else entirely?

        • I would suggest something along the lines of my Research Bond idea – use a debt for equity swap – or just use simple 10 year or even 30 year bonds.

          Plenty of scope to come up with some sort of solution – has to be better than MRRT debacle.

          Tieing export restrictions to “feed” off govt equity built into the project, whereby WPL could buy-back some of the bonds raised for a discount in the future instead of paying tax now is another innovation to explore.

    • Whats the benefit for Shell/Woodside?

      Given that Shell, possibly woodside, can borrow cheaper than the Australian government.

      Do they want to sell (effectively) half of their project to a JV partner that has no technical expertise to offer?

      Will the government provide 50% of the funds and only take 20%?

      no they wont.

      Not to say that government JV’s cant work. The NWS (Australia’s largest LNG facility) only got approval in 1980 because the WA state government signed take or pay 20-year gas supply contracts and funded the 1600 km Dampier to Bunbury Natural Gas Pipeline. An incredible amount of investment at the time for the state government.

      But that was when the state was desperate for economic development and gas from the perth basin was running out.

      http://www.woodside.com.au/Our-Business/North-West-Shelf/History/Pages/default.aspx

      • Toby my suggestion is that the govt “give” WPL 50% of the funds required to build the project.

        No borrowing for WPL, no expertise required for Govt

        Govt doesnt take anything – it just restricts the development from only selling 20% ish of its output overseas – the remainder MUST be sold locally.

        Benefit for WPL is they get their project done at a much reduced cost, which offsets the reduced export revenue potential.

        I’m no expert at this, just looking at it from a different point of view.

        I’d love to own infrastructure/gas bonds in my super portfolio.

      • notsofastMEMBER

        This is a great point. There would be no NWS without the WA taxpayer putting their heads on the chopping block AND we should not forget Alcoa Alumina Refineries as a foundation customer. That would mean most of the gas there would have remained stranded even to this day. The infrastructure created by the NWS project allowed the Pluto and Gorgon projects to be undertaken.

        And the Iron Ore Industry in the Pilbara would never have got off the ground without the WA taxpayer paying for all of the government required infrastructure, which was significant, for the initial projects in the 60s and early 70s.

        The Pilbara as it is known today was created with the limited resources of the WA Government and the WA taxpayer much more so than the Federal Government and its resources.

  5. reusachtigeMEMBER

    How do employment laws work on such a thing? If it’s an international ship couldn’t it just go by the hiring laws of whatever 3rd world country it decides to be registered in, and hire whomever it likes?

    • It could sail where it wanted to with a third world crew but it couldn’t operate in the Australian EEZ without the agreement of the Australian government.

  6. notsofastMEMBER

    I see a similar problem happening in South Korea as has happened in Australia. Too many people trying to build the same thing all at once.

    Surely some of these new FLNG ships could be built in Spain?

    I know its a lot bigger than an 232m long LHD but surely the concepts are similar and the skilled labour is there and would be very cheap.

    Might require some more infrastructure though.

    • “the skilled labour is there and would be very cheap.”

      Not a chance that the labour would be cheap with EU employment regulations. That is a major part of southern Europe’s problem. German wage levels with southern Europe productivity.

      • notsofastMEMBER

        Alex,

        There is a big difference between skilled labour and labour.

        And I maintain my position, in Spain they have “very cheap” skilled labour. And I would classify it as highly skilled labour if we want to be pedantic. Highly skilled labour that can build large military ships and high speed railways that doesn’t have any other work to speak of at the moment or in the future.

  7. This may sound a little cruel BUT the sooner FLNG wins out over the land based solutions, the better it will be for Australia.

    The simple FACT is Australian workers are uncompetitive they have created a tangled web of regulations, work conditions and absurd wages that must be undone, the sooner the better.

    the alternative is to continue down this road where we tell our kids that “she’ll be right” you were born Aussie, no need for studying, hard work or diligence just suck on the same teat as your dear old dad.

    Those days are over, actually they were over 30 years ago but the message just to a while to filter through. Today we live in a global world, where governments must compete, workers must compete, businesses must compete. There is just no other way.

    So next time your dear old dad suggests you follow in his footsteps, you might respectively suggest that the 30 years of head-up-ass, policy, that exemplify Aussie work place relations, have destroyed the body and soul of this once great country.

    So I’ll just repeat: Bring it on, open the door fully to globalized trade in all aspects of the Aussie economy. This way at least our kids will begin to fix the absurd system, they’ve inherited. I’d be totally depressed if I believed that my grand kids would still be trying to undo today’s mess.