The widespread increase in costs in Australia resulting from government regulations on emissions, chart topping energy costs and low production are jeopardising up to $100 billion of new projects in LNG alone, which would pump financial blood into the economy for years to come.
Woodside Petroleum (ASX: WPL) and BHP Billiton (ASX: BHP) are two of the biggest Australian-listed companies attempting to undertake projects that are being impacted by high costs, and the risk is that without intervention new projects could be lost to competing countries with far lower costs. East Africa, Canada and the United States are three viable options where lower costs and strong pockets of natural resource increasingly compete for investment dollars.
Woodside has already decided against the option to spend up to $46 billion on an onshore LNG processing facility at James Price Point because of high costs, instead considering a floating LNG option. Also under the gun is Santos’s (ASX: STO) proposed Bonaparte floating LNG, a joint venture being conducted with French energy company GDF Suez.
High costs have already claimed multiple casualties in Australia, the latest being iconic car manufacturer Ford, which will close up shop in 2016 after losses of $600 million in the last five years.
In Ford’s case wage rates were a major cost factor compared to other countries where it produces. The company’s wage rates in China are one-twentieth of Melbourne, while Europe is one-half and other Asian countries one-quarter.
For LNG producers, organised labour contracts and low productivity compared to other countries are a big turn off, and combined with government policies on carbon tax and clean energy, which has pushed the cost of power to among the highest in the world according to the Energy Users Association of Australia, the ‘cons’ start to quickly out-weigh the ‘pros’.
Oil and gas producers need to act in the best interests of their respective shareholders. If this means taking their business elsewhere they will. Unfortunately, if it happens it will come at the expense of the wider Australian economy.
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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.
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