Yesterday I read a Bloomberg article about how Africa is going to be the centre stage for the next 100 billion dollars of investments in the LNG industry, leaving Australia struggling to fund their planned program. As usual, I think the authors of the articles are missing some of the main points.

What I notice first is that both in this article and in several others, there are expectations for the cost per installed capacity to be as low as half that of Australia. So, I thought I’d try to figure out the reasoning behind this. What the articles point to is primarily that the reservoirs found in Africa are larger, and therefore offering better economies of scale. Surely, the reservoirs in Australia are also quite large so this difference can’t explain a halving of costs. In addition I expect the following aspects to represent a significant cost advantage for East Africa:

• Labor cost in Australia is skyrocketing, and efficiency of work force is not in any way proportional. This results in everything being done on land, from civil works, to construction and operation, being significantly more expensive in Australia than Africa.
• Offshore work, such as drilling, subsea installation, and pipelaying, is subject to Australian requirements, which includes the use of Australian staff. Same logic as on land; much more expensive in Australia.
• Typically, while Australian gas comes with high portions of CO2, East African gas is quite dry and requires much less processing.
• Typically, East Africa offers shallower waters and more stable sea floors, making installation work less complicated.
• Typically, East African gas reservoirs are closer to shore, reducing the length of pipelines.

The above could potentially prescribe a lower cost of development in Africa, but I will not be surprised if we see also these estimates jumping a few steps as the project developments mature.

The other thing we have to keep in mind, is that it is not really realistic to compare green field developments in East Africa with green field developments in Australia. New East African gas projects will compete against Australian expansion projects, not so much green field projects. Several plants are already built in Australia, which means a lot of infrastructure investments are already sunk. Developing tie-ins from new fields and building expansion trains will offer a much more cost-efficient way to increase output of Australian gas. Probably we will see some of the more expensive projects being canned, but a consolidation in Australia is probably an overall good for efficiency in project economics. Everybody needs a good competitor to really start competing, so I bet we will see Australia shaping up for a fight against East Africa.

The good thing; it looks like it will be gas on the market.