Woodside feels cost heat on $16bn Scarborough
Western Australia‘s resources sector faces higher labour and raw material costs amid a commodity price boom and Covid pressures.
Woodside Petroleum has defended the credentials of its $16bn Scarborough project amid questions over cost inflation and whether gas from the offshore field should be used to top up its North West Shelf plant rather than feed an expansion of the Pluto facility.
Western Australia‘s resources sector faces higher labour and raw material costs amid a commodity price boom and Covid pressures, according to energy contractors, raising concern the budget for Scarborough could blow out.
Raw material prices had risen but design efficiencies may help counterbalance any inflation, Woodside’s interim chief executive Meg O’Neill said.
“There are things on both sides of the ledger. Steel costs are up but it’s probably worth noting for a development of this size that raw steel costs are 10-15 per cent of project costs,” Ms O’Neill told the Credit Suisse 8th Australian Energy Conference on Tuesday.
“There’s some cost savings on the ledger and as soon as we get updated numbers from our contractors we will be communicating with our shareholders.”
Japan‘s Chiyoda and the UK’s Wood Group said companies including Woodside Petroleum faced higher costs than a pre-Covid environment in 2019.
“From a labour point of view, I think they are kidding themselves if they think they are going to get it for the same price as they had in 2019,” Chiyoda Oceania chief executive Andrew Tan said.
“We‘re already seeing cost pressures across the whole industry and on top of that you have the Covid situation of potentially having to quarantine and doing things that in 2019 we never would have dreamt of. So costs will increase but if they want to start locking in costs – if I were a contractor there – I’d be recommending very early engagement.”
Contractor Wood Group agreed the industry was looking at cost pressures.
“Definitely you see labour cost pressure coming through particularly in WA with mining running hot,” Wood Group‘s president of strategy and development Azad Hessamodini told the conference.
“That‘s definitely cost pressure but there’s also a lot of hungry contractors when it comes to offshore to get the vessels going. We’re at the tipping point where if you don’t lock in some of those contracts now then you may be facing cost pressure.”
Analysts have also been agitating for Woodside to process Scarborough through NW Shelf rather than expanding its existing Pluto plant, easing balance sheet pressure and boosting Scarborough‘s break-even LNG price given lower NW Shelf tolls.
However, Woodside said it was not considering sending Scarborough gas to the NW Shelf even as the ageing plant required new sources of supply.
“That ship has sailed,” Ms O’Neill said. “It’s not as simple as saying gas is gas so put gas in this plant. The Scarborough gas is extremely dry and the NW Shelf at the Karratha gas plant was built for a very wet gas. To put Scarborough gas in large volumes through NW Shelf is pretty extensive surgery on an ageing plant.”
Woodside expects a 12 per cent internal rate of return on Scarborough with the investment making back its money in under seven years.
Former Woodside chief executive Peter Coleman noted longstanding issues to get a separate gas processing deal for Browse through the North West Shelf and said it was not an immediately easy fix to suggest the same solution for Scarborough.