Sydney (Platts)--19Nov2012/349 am EST/849 GMT

Australia is already the world's most expensive place to explore for and produce offshore petroleum and it runs the risk of missing out on another $150 billion worth of investment in new LNG projects if it cannot be cost competitive, Santos CEO and Managing Director David Knox told the Australian Institute of Energy Conference in Sydney Monday.

"The prize up for grabs for Australia and its competitors is nearly 90 million mt/year of uncontracted Asian LNG demand in 2020," Knox said. "The challenge today is for Australian LNG to remain cost competitive so that new projects are sanctioned to meet both Asian and domestic demand. Without these additional projects going ahead, new investment in Australia's LNG industry will dry up in 2017."

According to Knox, recent studies have shown that Australia is now the most expensive offshore E&P location in the world -- three times as expensive as the US Gulf Coast, and slightly costlier than Norway.

"Australian projects are getting more expensive," he added. "The Australian LNG projects currently under construction are now 80% more capital intensive than those already in operation. A lot of this cost is labor, with the cost of Australian labor double that of many of our competitors, and productivity in most cases lower."

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Knox called for Australia's federal and state governments to work with the industry to streamline regulations and remove unnecessary and costly barriers to development, and for the industry itself to improve its cost effectiveness. Australia must also address its lack of skilled labor, he said.

"To successfully address the skills challenge we need to open our minds as a nation, and realize that there is no skills shortage if we truly see ourselves as a part of Asia," Knox added. "The skills and talent are plentiful in our region, and we are well positioned to take advantage of it. We simply have to give ourselves the permission, and realize that opening up as a nation has its true advantages."

Knox reiterated Santos' opposition to a domestic gas reservation policy, which he said would create uncertainty and lower confidence in Australia as an LNG supplier to the Asian region.

"No one should be fooled, a gas reservation policy will create market distortions, inefficiencies and would lead to a shortage of gas in Australia, and ultimately higher prices than otherwise," he said. "In my opinion a domestic gas reservation policy is the wrong approach to meeting our energy needs."

According to the Australian Petroleum Production and Exploration Association, Australia has 819 Tcf of natural gas. In 2009-10, the entire Australian economy consumed only 0.9 Tcf, with a further 0.9 Tcf exported.

Knox told the conference that Australia has more than 50 years of known gas reserves and resources to support both domestic and export markets, without taking into account shale gas, estimated by the US Energy Information Administration at close to 400 Tcf. Santos and others are seeking to bring on stream coalseam gas and shale gas, which requires scale and advanced technology, he added.

"These resources, while abundant, are in reality more costly to produce," Knox said. "If it were not for the export market, much of this gas would remain in the ground. It is this increase in demand from Asia and the ability to sell LNG into Asia at oil-linked pricing that has led to the unprecedented scale and pace of development of Australia's gas resources."

Australia is currently enjoying a $180 billion LNG investment boom, with seven major projects under construction. The new plants are expected to raise Australia's LNG capacity from around 24 million mt/year to more than 80 million mt/year by 2017, with most of the additional output earmarked for markets in Asia.

"What Australia needs to grasp is the potential for this economic contribution to grow," Knox said. "If the next wave of projects go ahead, the oil and gas industry will add an additional $150 billion of investment in the period to 2025, accounting for nearly two-thirds of all business investment in Australia."

--Christine Forster, christine_forster@platts.com --Edited by E Shailaja Nair, shailaja_nair@platts.com

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