The threat of rising costs cannot be overemphasised for Australian LNG producers. It has been a widely publicised that the cost of building new LNG projects is up to 30% higher than in North America and Africa and is a strong warning that new projects are at risk if this is not brought down.
Last week, Santos’ (ASX: STO) Vice President of Western Australia John Anderson outlined to attendees of the South East Asia Australia Offshore Conference (SEAAOC) the company’s strategy to fight climbing costs by targeting energy-rich areas with existing infrastructure and placing a renewed focus on collaboration with other players.
Focusing on areas with existing infrastructure can significantly reduce capital costs in sparsely populated energy basins, many far from easy transport routes. Santos has identified the Cooper Basin in South Australia and McArthur Basin in the Northern Territory as two regions where existing pipelines can be utilised to transport oil and gas discoveries to processing plants the company already has stakes in — Moomba in the south and Darwin in the North.
Santos’ second focus area is to increase efficiency and productivity by collaborating more with other energy partners. Deals with other companies can prevent doubling up on capital intensive requirements like production plants and pipelines.
This approach is supported by consulting firm McKinsey who suggest greater collaboration will help to cut time spent on building new LNG infrastructure, reducing the time to commercialising discoveries.
Some commentators have questioned why more collaboration was not attempted by Queensland’s three big LNG export projects on aspects like pipelines, suggesting final costs could have been sizably reduced.
Santos is keen to maximise these benefits going forward. So far this year the company has announced deals with Drillsearch (ASX: DLS) in the Cooper Basin and Talisman in Papa New Guinea to acquire permit acreage and share exploration costs.
The Browse Basin is especially seen as a huge opportunity for future collaboration given its remoteness and significant size. Getting together with other operators such as Woodside Petroleum (ASX: WPL) could benefit the whole industry.
Lower costs and higher productivity are essential to ensuring the success of new LNG projects in Australia. The two target areas will help to close the gap on other LNG producing nations and keep Australia competitive.
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Motley Fool contributor Regan Pearson does not own shares in any company mentioned.