Australia’s energy sector, or at least LPG and CSG sectors, is not yet creating the impact of iron ore or coal, and in some ways represents more a play on the future than either of the aforementioned commodities. But there is also likely to be a growing polticisation with these industries, if only because of their sheer scale. And handling scale is also an issue. As one engineer commented to me, Australia’s engineers are good at bulldozing mountains of dirt into railway carts or trucks, but the project management skills require to deal with complex extraction are not good (despite the endless chorus of self congratulation). This may not matter too much, given that the foreign multinationals ship the people in with those skills, but it is still a largely unaddressed issue.
A Macquarie report takes up these themes and details the risks:
- Growing political, environmental and community risks facing local operators are also becoming increasingly relevant (to say nothing of the continued rise of the A$).
- Political: The retrospective intent of RSPT, the ambiguities of the carbon tax, increasing support for landowners over resource owners, growing union influence and the harsh interpretation of ‘use it or lose it’ provisions speak to Australia’s (and in some cases PNG’s) rising political risk profile.
- Environmental: Whether its CO2 emissions, disturbing underground aquifers, fraccing chemicals, bilby colonies, whale migrations, rock art or dinosaur footprints, the sector is facing growing environmental scrutiny. This is likely to drive increased regulation and incremental cost.
- Community: Local communities at both James Price Point and in the CSG fields are becoming increasingly vocal in their opposition to LNG projects. Also in PNG there have been several instances of community disturbances temporarily halting progress on the LNG development. Elsewhere operators have to work harder to win over local communities
- bracing for an influx of foreign labour and rising prices.
Macquarie is trimming its price targets by about 5%, which is modest. Its report alerts investors to an extremely important issue: the radically altering political economy of Australia. It was once the mine and the farm, for a while it aspired top be the hotel, then the school. Now it is very much back to just the mine (the farm has been sold off) and everyone out of the resources sector is going to have to adjust:
Australia’s LNG flame burning bright….but for how long? Despite accounting for almost 70% of global capacity currently under construction, the local LNG industry is struggling with a broader credibility issue over the deliverability of its large, capital intensive projects. With these development woes only set to grow as more projects are sanctioned, cost pressures will continue to rise but so too will the associated political, environmental and community risks discussed here. As a result, we believe the return erosion witnessed at Pluto is likely to be a sign of things to come and hence our explicit inclusion of these risks and the ensuing cut to valuations.
This is not just a political issue. It is an investment issue. The industry’s handling of both politics and issues of scale will be critical.