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15 Dec The Costly Red Tape Burden In Australia’s Gas Industry

 

My firm recently published another paper in its series called Building The Lucky Country (BTLC), this one on Australia’s national productivity, called Get Out Of Your Own Way. You can find the paper here, and if you’re pressed for time, check out the video version here. The series is about securing Australia’s prosperity, and the prosperity equation is that our nation get wealthy when more of our workers actually work, when other nations pay us more for what we make or sell, and when we become more productive making what we sell. The paper points out that Australia is absolutely champion at writing up regulations and rules to govern behaviour of individuals and companies, and this self-imposed RED TAPE is sapping our productivity. Improving our productivity is key to securing Australia’s prosperity as our population ages and commodity prices moderate. The paper was silent on the productivity of the gas industry (although it did touch mining), which begs the question on how Queensland’s gas industry is faring. Here’s my view.

 

Measuring Productivity in Gas

The oil and gas industry, for all its immense size, is actually not a big employer of people. It’s really all about making the assets in the industry as fully utilised and efficient as possible, so the prosperity equation (more people working, more efficient people, higher prices) doesn’t quite fit. Improving the prosperity of the industry is more about getting the most gas possible from the fewest number of gas wells, minimising the cost of the wells, keeping the gas wells running at their peak for as long as possible, making the people involved in getting gas to market as productive as possible, minimising the cost of the various assets required to handle the gas (such as pipelines, water treatment, compression, processing plants, LNG plant), which means larger and more highly utilised assets, keeping those assets running at their peak, and selling LNG for the highest possible price. So how are we doing?

 

Not too bad, but not great

Let’s deal with pricing of the product. In case you’re not watching too closely, the price of LNG has tumbled recently with the fall in oil prices. So strike one – we’re not going to receive the high prices of 6 months ago for our product. Further, there’s loads of competition on the horizon which means the future price of LNG won’t likely be as high. And our pricing formula (LNG priced with reference to oil) ties us to oil prices, which we don’t control. Oil markets look over supplied, so lower prices are here for a while. Therefore we need to get our productivity improvements elsewhere.

 

What about the gas wells? The industry is getting better at finding the best places to drill so as to minimise the number of gas wells it needs, but there isn’t a lot of experience yet in maximising the production of gas from the wells (call it a work in progress), or keeping them running at peak for longer. This challenge will fix itself in time as we get more experience with dewatering, optimisation, operations, LNG production, and so forth. And the industry will need to learn how to identify when gas wells should be abandoned rather than providing them with a continuous flow of services to keep them running.

 

What about minimising the gas processing assets and their costs? It’s a bit late to challenge whether the industry has overbuilt its assets, or paid too much, and hindsight is always perfect. If the industry had to do it all over again, would we see three pipelines to Gladstone, three LNG plants? Probably yes. And across Australia’s other LNG projects, the average cost increase is 25% above the original planning numbers. Not doing too well here: strike two.

 

How about the people? The three Queensland gas projects generally feel that there’s still too many people in the field. The projects and their various contractors and suppliers have multiple layers of supervision, for example, to help offset low experience levels, and supervisory people cost more than front line workers. Reorganising the field work, and using technologies to allow supervision from a central spot will help.

 

 

So Where Is The Red Tape?

The gas industry is actually more like a combination of construction and mining, and that’s where the RED TAPE lurks. We’ve been building gas infrastructure (gas wells, pipelines, gas plants, LNG plants) for the last 24 months or so, which are classic major capital construction projects. The analysis in BTLC shows that the construction and mining industries feature the fastest growing number of compliance workers as a share of overall workforce, and this would be true of the Queensland LNG industry too. Supervisors, health and safety, inspectors, testors, heritage monitors, community liaison. The list goes on.

 

The Oxford Institute for Energy Studies, in its recent review of Australia’s LNG sector, pointed out that Australia’s construction sector is between 40%-90% more expensive than its equivalent in the US. A big chunk of that excess cost is related to RED TAPE.

 

Here’s a few examples of some of the rules in the gas industry that really need to be revisited.

 

•  Equipment washing. One of the rules in the sector is that equipment must be washed when it is moved from field to field. This makes sense – we don’t want to transfer seeds and insects from one field to another. But the rule is meant for moving equipment between fields, not within a single field. Some contractors interpret the rule to mean decontaminating kit for every move, to provide assurance that there will be no contamination. But this adds thousands of dollars in cost because the equipment, its trailers and trucks need to loaded up after use, hauled to a registered wash-down site, and hauled back.

Well head design. Well heads need to be strong enough to contain pressure from underground coal measures and eliminate blow outs. Gas wells in Queensland vary greatly in pressure, but for a very sizeable number, the pressure is quite low (like bicycle tire pressure). To date, engineering rules require that well heads be rated for the maximum possible pressure that could be theoretically encountered anywhere (making them larger, heavier, more costly to install) so as to assure there will be zero possibility of a well blow out.

•  Supervision. It’s a standard practice in the oil and gas industry that drill sites have a “company man” on site to support drilling activities. This makes sense when each well is uniquely designed or there’s lots of uncertainties in the geology. But that’s no longer the case in Queensland where there are thousands of wells and the industry is trying to make them as similar to each other as possible.

Impact statement reporting. The Queensland projects have thousands of reporting requirements associated with their environmental impact statements. Complying with all these requirements entails staff training, incremental data collection, special reporting, additional systems, etc, none of which can be recovered by charging the customer more for the LNG.

 

 

This Is Costing Us

There’s a price to this RED TAPE. One of Queensland’s gas projects estimates that its gas field workers are at best 33% productive, spending the majority of their time travelling to and from well sites, or performing admin tasks, rather than making sure gas wells are working to their peak. The contractors that I’ve worked with believe that their workforce is about 40% productive. There’s a lot of stand-around time, early quits, late starts, travel, etc. That’s enough anecdotal evidence to think there’s a prize worth pursuing. In hard math terms, assuming the gas industry will be 2.6% of Australia’s $1.9 trillion GDP, and that RED TAPE is fully 13% of GDP (according to the BTLC calculations), then the RED TAPE prize in the gas industry is 13% of 2.6% of GDP, or $6.4 billion. Ok, you have my attention.

 

 

Working On It

The industry has a multi-headed program underway to understand its producivity pressures.

•  APPEA has a productivity committee comprised of the projects and a few key suppliers to look at improvement possibilities.

• The three active Queensland projects have a set of working teams tackling upstream and downstream engineering issues.

• All of the projects are working hard to extract costs by removing people from the field and trimming head office staffing levels.

 

But what else could be done? I’ve written several times about cost reduction (here, here , here, here). Contact me with your ideas.

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