Woodside, BHP, Santos battle high costs

At the same time the mining industry and Australia in general have been worrying about the iron ore and coal industry trending down because of low commodity costs, oil and gas producers are at most likely a high point in their business cycle, where too much demand is chasing too little supply. This is a mixed blessing of profit-making, offset by the rising costs of finding, extracting and selling the natural gas and oil that the world so desperately needs.

With its large populations, Asia is already a big LNG consumer, and many countries are still developing so their energy needs keep growing. Australia is trying to satisfy that need, and there is about $190 billion worth of oil and gas projects on the table around the country. The majority of it is gas, the necessary commodity that helps generate electricity and heats homes, and it is in high demand.

However, the cost of constructing these projects — some as high as $30 -$50 billion — have increased beyond their original projections, causing the oil and gas companies to consider delaying or mothballing some of them.

Woodside Petroleum (ASX: WPL) prefers to use floating natural gas plants instead of onshore plant facilities for its Browse project. In addition to facing fewer environmental protests after the James Price Point gas terminal near Broome was rejected, the cost of constructing and running them will be less. The floating plant construction can be done overseas, in regions that have much cheaper labour and construction costs.

The much talked about Gorgon project offshore near WA has been causing money troubles for Chevron (NYSE: CVX) — the original $37 billion price tag in 2009 has swelled about 40% to stand at $52 billion. While it and many other companies like BHP Billiton (ASX: BHP) and Santos (ASX: STO) struggle with cost projections, the other side of the coin — potential profits — may become more elusive.

With increased development of US shale gas, there is strong possibility that the US will become a natural gas exporter, throwing world supply and demand off towards much cheaper LNG prices. Already about four LNG export terminal hubs are on the drawing board, bringing its domestic prices down to US$3-$4/mmbtu (million british thermal unit).

The problem is that the US has never had big LNG exportation facilities since it relied more on incoming oil supplies to power the nation. The cheaper LNG is “bottled up” in the US, and can’t get to world markets at the levels that Asia would like. Asian LNG customers of Australia see the price disparity where US LNG could be about $10/mmbtu after shipping and handling against the $13-$14/mmbtu they are currently being charged for Australian LNG.

Foolish takeaway

It’s still a sellers’ market because the companies are only grumbling, and not walking away. Soon enough, though, they may do just that once US supplies open up. In addition, the increased future LNG supply from the projects currently being developed may cause commodity prices to fall, making the profit projections of many of these big projects wither away.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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