Global energy companies have expressed great interest in operating in resource-rich Australia. Currently, seven liquefied natural gas export projects -- worth nearly A$200 billion -- are simultaneously being developed in the land down under.
But according to industry executives, spiraling costs and new sources of supply threaten to diminish the attractiveness of some of these ventures. Let's take a closer look.
Australia's sky-high labor costs
At an oil industry conference in Brisbane last month, the CEO of the Australian Petroleum Production and Exploration Association, David Byers, warned that new LNG projects to be built in Australia might be moved to other countries unless costs can be brought down substantially. Indeed, Australia is arguably the most expensive place for energy companies to operate.
According to a survey by recruitment firm Hays, Australian oil and gas workers are the highest paid in the world. Last year, they pulled in an average salary of $163,600, about 25% more than their U.S. counterparts, who made an average $121,400. Not surprisingly, several companies operating in Australia have reported major cost overruns.
Chevron (NYSE:CVX) announced in December that its budget for the Gorgon LNG project in Western Australia surged 21% from the company's previous estimates to A$52 billion. As a result, some operators are reconsidering or even scaling back their ventures in the country. Royal Dutch Shell (NYSE:RDS-A), for instance, said it is thinking about holding back on the $20 billion it was planning to spend on the Arrow LNG project in Queensland, citing the project's challenging economics as the reason.
New sources of LNG supply
In addition to cost inflation, competition from new sources of supply poses another threat to the viability of Australian LNG projects. According to Andrew McManus of Wood Mackenzie Australasia, LNG buyers are now shifting their focus to the US, where projects are potentially less expensive and offer greater flexibility.
Though only two U.S. LNG projects have been approved to export natural gas to countries that don't have a free-trade agreement with the U.S. -- Cheniere Energy's (NYSEMKT:LNG) Sabine Pass terminal in Louisiana, which was approved in 2011, and the Freeport LNG project in Texas, a $10 billion facility whose general partner, Freeport LNG-GP, is 50% owned by ConocoPhillips (NYSE:COP), which was greenlighted last month -- the U.S. Department of Energy is expected to approve several more over the next few years.
And even though there remains great uncertainty over the "timing and volume" of U.S. LNG exports, Wood Mackenzie nevertheless forecasts that the U.S. and Canada will account for half of the world's potential new LNG capacity by 2025.
The bottom line
Going forward, Australian LNG operators have their work cut out for them. In addition to bringing down operating costs, reaching final investment decision dates for key projects will be crucial if they are to become competitive against similar ventures in the U.S. and other key LNG regions, such as Canada, East Africa, and Russia.
East African ventures, many of them expected to come on line in 2016, may pose an especially severe threat. Not only are operating costs significantly lower in East Africa -- with labor costs, in some instances, less than half of what they are in Australia -- but the region is also bolstered by its ideal geographical location, allowing it to potentially supply both Asian and Atlantic markets.
With major gas-producing regions vying for profits in the growing global LNG trade, Australia will need to find ways to become competitive or risk having the energy industry's capital flee from its borders.
Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.