$164 billion risk to the economy

The $164 billion risk to the economy

High labour costs, resource shortages and the high Australian dollar may drive gas companies overseas

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 31, 2012 10:44 am AEST

In a further potential blow to the Australian resources industry, in the wake of falling iron ore prices and soft housing construction numbers, recent gas discoveries in Africa could entice $164 billion worth of investment away from Australia.

The $164 billion in LNG (liquefied natural gas) projects could be at risk, after the discovery along Africa's east coast of the world's biggest gas finds. Shell, BG Group and Total may scale back plans to build liquefied natural gas (LNG) plants in Australia and switch to Tanzania and Mozambique, where those plants could cost about half as much to build, according to a report by Jeffries International.

Gas fields discovered off Mozambique contain more than 100 trillion cubic feet of gas resources, theoretically enough to meet Asian demand by itself for almost five years. BG Group is also developing plans for an LNG project in Tanzania, after discovering 7 trillion cubic feet of gas. At the same time it's trying to find a partner for its Australian Curtis Island LNG project to share the investment burden.

High labour costs, the high Australian dollar and shortages of gas are making building LNG plants more expensive. Woodside Petroleum (ASX: WPL) has put on hold its plans for a second LNG "train" at its Pluto project after being unsuccessful at finding further gas to support its construction. Woodside may be forced to source gas from other producers nearby in order to proceed with further expansion of Pluto.

According to the Australian Bureau of Resources and Energy Economics, there are seven LNG projects under construction at a value of over $164 billion, which in full operation would increase Australia's LNG export capacity from around 24 million tonnes a year to over 80 million tonnes a year. They include the Australia Pacific LNG project – 37.5% owned by Origin Energy Limited (ASX: ORG) and Gladstone LNG – 30% owned by Santos Limited (ASX: STO). These and other projects may be at risk, if these gas giants can build LNG projects in Africa more cheaply.

That doesn't include the controversial Browse or Sunrise LNG projects, which Woodside is looking to develop. BHP Billiton (ASX: BHP) has a 10% stake in the Browse project.

The potentially good news for Australia, is that Africa lacks the infrastructure and regulatory environment that is needed to take the projects from the exploration phase to the production phase, and that could slow them down. Santos' CEO, David Knox has said that there is real competition for projects due to completed around the year 2020, but Australian companies can compete, provided they keep productivity up, can unlock the resources required for the projects and keep costs under control.

The Foolish bottom line

On top of signs that the mining boom is at worst over, or at least slowing significantly, this is news that Australia didn't need, as a threat to our economy, our jobs and for investors, the share prices of our gas companies.

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Motley Fool writer/analyst Mike King owns shares in Woodside and BHP. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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