LNG: Lessons from Down Under

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S U N D A Y

T H E P R O V I N C E . C O M

NOVEMBER 24, 2013

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The Chevron-led Gorgon LNG plant in Western Australia. PHOTO COURTESY OF CHEVRON

Lessons from Down Under

NNWhat B.C. can learn from Western Australia,where state debt and the cost of living are both

on the rise as $100 billion gets poured into thebooming LNG industry PAGE A8

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PERTH, WESTERN AUSTRALIA

S tanding at one of the worldsmost isolated vantagepoints, Ben and Pete looksouth to Antarctica from

stunning Greens Pool on Western Australias south coast.

Their backs are to the camera. A conf idential ity agreement withtheir employers has seen to that.But the pair are willing to talk off

the record about their lives as high-paid fly-in-fly-out (FIFO) workerson the $100-billion worth of liq-uid natural gas plants being builtin W.A.

Its a good life. Pete, 32, a boiler-maker on Chevrons $52-billionGorgon project, earns $150,000 a year and gets three months off.

Ben, 35, a member of the powerfulMarine Union of Australia (MUA), works on a tug boat operating out of

Dampier on the northwest coast of W.A. and pulls in $170,000 a year.

I worked on Pluto (WoodsidePetroleums recently completedLNG plant) and Gorgon is startingto take off now, said Pete, dressedin the Australian standard sun-glasses, surf-brand T-shirt, boardshorts and flip-flops.

Ben and Pete are happy with theirlot. The two men own houses, nice vehicles and boats and travel at will.

FIFO workers make up 50 per centof the W.A. resource industry work-force, taking their wealth every two weeks from the work site to wher-ever they live.

But the pair agree there is a darkside to their success: fixed income workers in traditional labour fieldssuch as policing, teaching and nurs-ing are facing soaring living costs.

Its wreckin Australias cost ofliving, said Ben, with a distinctive

Aussie drawl. If you arent in thepie, how do you survive?

The British Columbia governmenthas pegged the provinces future onan LNG industry it claims will wipeout provincial debt, create tens ofthousands of jobs and generatebillions of dollars over the next 30 years in taxes and royalties.

But as W.A.s economy hasboomed, so too has the cost of liv-ing.

House prices tripled between2000 and 2013 and the small thingscost more. A cup of coffee in Perthsets you back $5 and a jug of beercosts at least $21.

Rents in the LNG-driven north-ern towns of Karratha and Damp-ier can go for $6,000 a month for athree-bedroom house while Perthsrental vacancy rate is close to zero.This makes life harder for peopleon fixed incomes.

David CarriggCITYEDITOR

[email protected]

twitter.com/davidcarrigg

GREENS POOL, Western Australia: Pete, left, and Ben are high-paid fly-in-fly-out workers on the states LNG developments. PHOTOS BY DAVID CARRIGG

B.C. needs to be wary of hikesin cost of living and provincialdebt, experts warn

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Project developers are strugglingto contain costs and despite W.A.smassive and growing LNG indus-try, provincial debt has never been

higher. W.A. is where British Columbiashould look to learn how to andhow not to transition into anLNG economy.

Peter Strachan is a Perth-basedLNG analyst who has no doubtthat Asian-driven demand for LNG will inc rease with the enormousamount of the product set to comeon line over the next decade.

But the lanky MBA and former world traveller said the B.C. gov-ernment must be mindful of infla-tionary pressures that come withLNG mega-projects.

What you will see in B.C. arethe guys arriving wearing big belts with big buckles and hats earningbig bucks, said Strachan, sittingin a caf overlooking Perths Cot-tesloe Beach.

Those are the guys who will putpressure on housing, schools andinfrastructure like what weve seenin Perth. You have pressure fromthe FIFO guys, like chefs making$300,000 a year, but there are alsothousands of engineers working inPerth and all their kids go to privateschools. So the private schools getbigger and fees go up. But youvestill got people on a fixed incomemaking $74,000 a year.

So five per cent of the communi-ty are better off because of higherincomes from a high level of invest-ment in a small sector of the com-munity, in this case LNG. Maybe 10per cent break even and the oth-er 85 per cent are worse off. Theydont get the same sort of income

increases as those directly involvedin the area of investment, yet theircost of living rises. Costs of rent,food service and utilities rise foreveryone as more infrastructureis required to meet the needs of arapid jump in population. W.A. has the fastest growing pop-

ulation of any Australian state, withan increase of 85,000 in 2012 to 2.5million.

Strachan also warns BritishColumbians to be wary of any gov-ernment promise that LNG royal-

ties will wipe out provincial debt.He said when the first shipmentof LNG departed W.A. shores forJapan in 1989 the state governmenthad no debt. As of June 2013, W.A.s debt was

$18.4 billion and is expected toincrease to $28.4 billion by 2017due to infrastructure spending.

Last Tuesday, Minister for Nat-ural Gas Development Rich Cole-man said B.C.s $40 billion debt willbe wiped out in 15 years if four LNGplants are built.

Coleman said some countries, while not pointing to Australia, hadused revenues from LNG to go ona spending spree and thats some-thing his government would avoid.

Its about how you manage youroperations, Coleman said.

B.C. Premier Christy Clark is cur-rently in Asia pitching the prov-inces LNG dream while the B.C.

government works on a corporateincome-tax regime that wouldapply to LNG exporters.

Those details will be presentedby the end of the year to the vari-ous groups interested in develop-ing an LNG plant.

Coleman accepted the risk ofcost-of-living rises in the wake ofconstruction investment but add-ed once that five-year phase is over,the economy would settle down.

#$%&%'( *+,-.#%! Size: 945,000 square kilometres.Population: 4.6 million.Population of capital (Vancouver):2.5 million.Provincial debt: $40 billion.Driving distance from Vancouver toproposed LNG plants: 1,500 kms.

/0'&0$1 !-'&$!,%! Size: 2.5 million square kilometres.Population: 2.5 million.Population of capital (Perth): 1.9 million.

Provincial debt: $28 billion.Driving distance from Perth to LNGplants: 1,500 kms.

What youllsee in B.C. arethe guys arrivingwearing big belts

with big bucklesand hats earningbig bucks.

PETER STRACHAN

LNG ANALYST

HENDERSON, Western Australia: Pre-fabricated cylinders will be placed on a barge and towed for three days up to the Chevron-led GorgonLNG development on Barrow Island off W.A.s northwest coast.

Maps not to scale

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He also added that, unlike Aus-tralia, which has a limited labourpool leading to higher wages, B.C. will have access to a North Ameri-can workforce. The government isalso doing its best to ensure thereare enough tradespeople for theexpected LNG construction. Thekey LNG proponents are expect-ed to make their Final InvestmentDecisions by the end of 2014. That would mean the first shipment ofLNG would occur in 2019.

Simon Fraser University eco-nomics professor Rick Harrissaid the W.A. government need-ed to spend a lot more on inf ra-structure than he expects willneed to be spent in B.C. He saidit is impossible to know right nowhow much the government willearn from LNG and what impactthat will have on provincial debt.

It depends on the price of nat-ural gas and a lot of things. I haveno idea how you can forecast it,he said.

Harris is fairly sure, though, thatthe cost of living will go up, espe-cially in Prince George, Terrace,Kitimat and Prince Rupert.

Booms raise incomes and somepeople get le ft behind, he said.

Strachan thinks Canadas polit-ical stability, lower labour costs

and cold climate which makeit cheaper to chill the natural gas

to LNG form will work in itsfavour when it comes to LNG, butsaid infrastructure spending willbe unavoidable.

An example of government infra-structure cost in W.A. is the $370million, 40-hectare Common UserFacility at the Australian MarineCentre in Henderson, 45 minutesdrive south of Perth.

The AMC CUF was created in2003 as a base for businesses wanting to compete for LNG ten-

ders and maritime projects. Thou-sands of tonnes of equipment from monster concrete caissons tocomplex control gear for the gascoolers is put together at the AMC and loaded on barges forthe three-day trip north.

In W.A. everything is huge, fromthe $100 billion being spent onLNG, to the 200-tonne capacityroad network, the 12,000-tonne

floating dock at the AMC and the$11 hamburger sold at PerthsScarborough Beach.

Gas is driving a massive pro-portion of our work, said Jona-than Smith, general manager atthe AMC. They call it oil and gas,but really its gas and oil.

Smith said the biggest chal-lenge for the companies devel-oping LNG plants in W.A. (whichincludes Shells first floating LNGfacility) is the remoteness of theprojects and the resulting impact

on costs, including supply-chainlogistics and labour.Without recognizing these

issues, costs can be very difficultto control and that causes prob-lems, he said. Alberta-based proj ect manag-

er Kevin Wilson, who spent 18months working in the Western Austral ian resource sector, saidtheres another thing that canimpact productivity.

Its called mateship. Wils on told The Province the

culture of mateship is based ona strong union movement and ageneral disdain for authority.

Aussies are not like us, Wilsonsaid. If someone is tapped on theshoulder to supervise they areloath to do it because they dont want to supervise their mates.

Mark Pownall, executive editorat Business News Western Austra-

lia, has been writing and editingLNG news since the late 1980s.Pownall is well dressed by Auss-

ie standards, with white shirt andcufflinks. He stands amid his six-person reporting team debatingthe cover of the next print edition. Whats news today is Shells bid

to build the largest ship ever to liq-uefy gas offshore.

Its a ship, but they are callingit a barge to get around the MUA.Stupid things like that go on here,said the laconic Aussie in BNsNorth Perth boardroom.

He said construction costsremain a huge issue for the gasplayers developing LNG plants.

Gorgon started at $43 billionand its already more than $52billion. Steel has become moreexpensive and you have 6,000people working there for three years and ever y g uy is workingnine months a year. No one earns

less than $150,000 a year and lotsmake $300,000 a year.

Pownall said its only since 2005that LNG has been on the publicsmind as people tried to figure whytheir cost of living was going up.

Its been largely overlooked, but we are set to become the secondlargest LNG exporter in the worldbehind Qatar, he said.

B.C. might be coming late tothe party, but the partys not over. Why wouldnt you want to diver-sify the economy with cleanerenergy? Its a stable industry andinsulated and long term. Even ifthe U.S. wants to completely openup its doors there is still strongdemand.

Dana Benner, Calgary-basedhead of research for Altacorp,is closely monitoring B.C.sambitious LNG plans and saidaction needs to be taken quick-ly. He agrees with Pownall aboutdemand, but warns things need tomove swiftly.

There is enough demand aslong as B.C. moves in an efficient way. There is a window and a lotof competition, he said.

Pacific Northwest LNG isled by the Malaysian gov-ernments PETRONAS and isexpected to produce 10 mil-lion tonnes per annum at aplant on Lelu Island north ofPrince Rupert. Initial engi-neering work is underwaywith a Final InvestmentDecision expected in late2014. The project wouldbegin export at the start of2019.

Kitimat LNG is a Chevron-led joint venture investi-gating construction of a 10mtpa LNG plant on Hais-la Nation land at Bish Cove,west of Kitimat. The projecthas an export permit andhas been in the works since2004 when it was initiallyproposed as an LNG importterminal. Front-end engi-neering work is underway.

LNG Canada

is spearhead-

ed by Shell Canada as a12 mtpa facility alongsidethe Rio Tinto Alcan smelt-er in Kitimat. The projectrecently submitted a Proj-ect Description to the B.C.and federal governmentsand public consultation isunderway.

Prince Rupert LNG is pro-posed by the UK-based BGGroup as a 14 mtpa facilityon Ridley Island near PrinceRupert. A Final InvestmentDecision is expected in2015.

Aurora LNG is a Chinese-government led (CNOOC)project that recently wonaccess to crown land atGrassy Point north of PrinceRupert. This project doesnot have an export permitand the CNOOC CEO saidthis month there is a longprocess ahead.

Key LNGcontenders

Peter Strachan is a Western AustralianLNG analyst. Pictured at Perths CottesloeBeach, Strachan warns LNG prosperity hasnot led to reduced provincial debt in W.A.

B.C. might becoming late tothe party, but the partys not over.

MARK POWNALLEXECUTIVE EDITOR, BUSINESS NEWS WA

HENDERSON, Western Australia: A transport ship is mooredat the end of the 12,000-tonne floating dock at the AustralianMarine Complex south of Perth.

Jonathan Smith is general manager atthe Australian Marine Complex. In thebackground are concrete caissons beingused on Gorgons LNG wharf.

Mark Pownall, executive editor atBusiness News Western Australia, saysconstruction costs are a huge issue forLNG developers.

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LNG: Lessons from Down Under