Gas demand puts Australia in box seat despite labour costs

Santos CEO David Knox says Australia is an "extraordinarily expensive place to do business".
Santos CEO David Knox says Australia is an "extraordinarily expensive place to do business".

AUSTRALIA'S gas reserves are abundant but expensive to develop, Santos CEO and managing director David Knox has told a conference in Sydney.

Speaking at the Australian Institute of Energy Conference, Mr Knox said the challenge was to be competitive.

"Recent studies show that Australia is the most expensive offshore E&P (exploration and production) location in the world today, three times as expensive as the US Gulf Coast and slightly more expensive than Norway," he said.

Mr Knox said Australian projects were getting more expensive.

"The Australian LNG projects currently under construction are now 80% more capital intensive than those already in operation," he said.

At Santos' GLNG project in Gladstone, labour costs make up 50-60% of total project costs.

"As individuals and organisations, and even governments, we need to be more productive, we need to continue to learn, apply ourselves better, and we need to be more disciplined and get value for our money," Mr Knox said.

"We shouldn't increase the reward for doing the same thing, but instead we should strive for and incentivise investment and innovation."

In an interview with Business Spectator on Wednesday, Mr Knox said the cost of an hour's labour in Gladstone "right now is, let's say, $100 an hour. That same hour's labour in North America and the Gulf of Mexico is about $50 an hour".

"So we're about twice as expensive as the average labour cost in the Gulf of Mexico.

"When you look globally at the cost spaces, if you want to build a platform or a small platform in the Gulf of Mexico, let's say it costs $100 just to use a number, in Australia that same platform would cost $330.

"So, it's an extraordinarily expensive place to do business. We need to build the scale. We really need to bring in the skills.

"We need to innovate. And we need to drive those costs down. Otherwise, we're not going to be competitive and we'd love to be competitive."

Read the full interview here

Mr Knox says Australia is in an excellent position because demand for gas is expected to climb.

The rising cost of oil and the growing needs of Asia will influence that demand.

"Australia's future is very much linked to the pace and scale of economic and societal change taking place in the Asian region - a region which provides us with a large and growing market for our resources," he said.

"Growth rates in Asia are being matched with a similarly fast-growing energy demand.

"This growth in energy is borne by the growth in living standards Asia is experiencing today, by millions of people across the region seeking a better way of life.

"Asia's transformation and its energy challenges are resulting in global projections for gas demand skyrocketing.

"The demand for gas is expected to grow by more than 50%, faster than any other fossil fuel in the 25 years to 2035."

Based on projected demand, Australia has more than 50 years of known gas reserves to support domestic and export markets.

However, east coast gas prices are expected to double over the next three to four years as Queensland's coal seam gas to LNG projects come online and the local market approaches ''export parity''.

Central Queensland University Professor in Regional Development Economics, John Rolfe, says at the moment domestic gas prices on the eastern sea board are lower than world prices.

"But when we get the new LNG plants built in Gladstone, they'll start exporting from about 2014.

"Then suddenly those domestic prices will start to even up with the overseas prices, so we expect the domestic prices to increase," Prof Rolfe told the ABC.

"Now some industries are calling for domestic gas to be reserved to artificially hold domestic prices down. I agree with David Knox that that's a mistake. I think it's better just to let the market forces operate." 

Mr Knox has warned that a domestic gas reservation policy would be ''simply counterproductive''.

"A gas reservation policy will create market distortions, inefficiencies and would lead to a shortage of gas in Australia, and ultimately higher prices than otherwise," he said.

"It would also create further uncertainty for gas companies, their investors and lower confidence in Australia as a supplier of gas to the region.''

Topics:  business gas glng lng mining industry santos

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