EnergyQuest APPEA Cost Report - 20141101 - Final

Oil and Gas Industry Cost
Trends
An independent report prepared by EnergyQuest

for the Australian Petroleum Production and
Exploration Association
1 November 2014
Contents
Key Points ...........................................................................................................3
Terms of Reference.............................................................................................4
Concepts .............................................................................................................4
Drivers of costs....................................................................................................5
Global cost trends ...............................................................................................5
Australian costs ...................................................................................................7
LNG development costs ......................................................................................7
Offshore domestic F&DC ....................................................................................9
Queensland F&DC ............................................................................................10
Eastern Australia F&DC ....................................................................................10
Cost drivers .......................................................................................................11
Exploration costs ............................................................................................................ 11
Field and plant investment.............................................................................................. 12
Cost of materials............................................................................................................. 14
Labour costs ................................................................................................................... 15
Regulation and community benefits ............................................................................... 17
Supply restrictions .......................................................................................................... 17
Terms of use .....................................................................................................19
Figures
Figure 1 Global F&D costs (US$/boe) ........................................................................................................................ 6
Figure 2 Global upstream capital and operating cost and oil price indexes (2000=100) ............................................ 6
Figure 3 Australia rolling three year finding and development costs, oil and gas, proved and probable (A$/GJ) ...... 7
Figure 4 LNG project costs (US$/tpa)......................................................................................................................... 8
Figure 5 Greenfield Australian and PNG LNG project development costs (A$/tpa) ................................................... 8
Figure 6 Offshore domestic gas development costs A$/GJ of 2P reserves ............................................................... 9
Figure 7 Queensland finding and development costs (A$/GJ) ................................................................................. 10
Figure 8 Santos rolling three year finding and development cost, eastern Australia ex-GLNG (A$/GJ) .................. 11
Figure 9 Average exploration cost per well, onshore ($m) ....................................................................................... 12
Figure 10 Average exploration cost per well, offshore WA ($m) .............................................................................. 12
Figure 11 Aggregate gas supply for the east coast for 2018 ($/GJ) ......................................................................... 14
Figure 12 China domestic hot rolled steel sheet (US$/t) .......................................................................................... 15
Figure 13 Offshore construction annual salary including superannuation ................................................................ 16
Figure 14 Oil and gas industry salaries .................................................................................................................... 17
Level 30 91 King William St Adelaide SA 5000

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2
Key Points
Petroleum industry costs have been increasing globally since 2000. Finding and
development costs (F&DC) for new reserves increased six-fold between 2000 and
2013, from less than US$5/barrel of oil equivalent (boe) to over US$25/boe.
According to IHS CERA, global upstream capital costs have more than doubled since
2000 and operating costs have nearly doubled. (The even greater increase in F&DC
implies that reserve additions per dollar spent on development have also fallen.)
There have also been significant increases in Australia. In the three years to 2013 total
Australian F&DC averaged $4.16/GJ, 2.7-times the average for the three years to 2007.
The average cost of Australian and PNG LNG projects (including both upstream costs
and LNG plant development) increased by 33% between 2009 and 2013, reflecting
both higher upstream and plant construction costs.
Costs have increased substantially for development of offshore domestic gas projects.
A decade ago offshore domestic gas projects could be developed for less than
A$1.00/GJ of 2P reserves. Costs are now up to A$3.00/GJ, a three-fold increase. The
increase reflects higher costs for drilling rigs, labour and materials, such as steel, and
also lower field size and quality (requiring more treatment).
F&DC in Queensland have increased from an average of A$0.83/GJ in the three years
to 2011 to A$5.37/GJ in the three years to 2013, a 6.5-fold increase. Costs were low
when companies were mostly in the exploration phase but have jumped significantly
with LNG development underway.
Santos eastern Australia F&DC (excluding GLNG) have increased from A$1.76/GJ in
the three years to 2011 to A$3.15/GJ in the three years to 2013, almost a two-fold
increase. If Santos is unable to develop its NSW reserves its F&DC will increase to
A$4.21/GJ to 2011 and A$5.88/GJ to 2013.
Anecdotal evidence is that current infill drilling for gas in the Cooper Basin is marginal
economically, even at current higher gas prices. Current development costs to increase
production capacity are estimated at around $5/GJ, to which has to be added operating
costs, taxes and royalties and a profit margin.
Higher exploration costs are an important driver of higher F&DC. A decade ago the
average exploration cost in the Cooper Basin was $2-3m per well. It has since doubled,
notwithstanding more efficient drilling practices. The average exploration cost in
Queensland (reflecting both conventional and CSG targets) has increased from less
than $1.0m per well in 2008 to almost $3.0m in 2013. Offshore Western Australia there
has been a steep increase in costs over the last decade from $10m per well to $90m.
This reflects higher rig rates and more challenging drilling.
The overall cost of the Turrum-Tuna-Kipper project in Bass Strait, including the gas
conditioning plant, is approximately $5.6 billion to develop 400 MMboe of oil and gas,
with a development cost of $14/MMboe or $2.45/GJ, notwithstanding that the
development will only maintain, not increase production through the existing Longford
plant.

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The best oil and gas fields are developed first and development then moves to higher
cost fields if commercially viable. Based on AGLs estimate of the east coast gas cost
curve (breakeven prices), the large bulk of east coast resources are estimated to have
a break-even price of over $5/GJ, increasing to over $9/GJ.
There have been significant increases in the cost of materials. The price of Hot Rolled
Coil steel ex-Asia, used for tubulars and gas transmission pipelines, increased through
the 2000s and peaked in 2011 at over US$700/tonne. Prices have since declined (in
US$ terms) to around US$500/t but they are still significantly higher than during the
2000s.
High Australian labour costs are one of the drivers of higher costs. Incitec has said that
it will cost around $1 billion to build its new ammonia plant in the US compared with
$1.4 billion in Australia. Labour costs would be 35% of the total project in the US
compared with 60% in Australia. Bechtel has quoted earnings of $3,000 per week for
special class welders, the equivalent of $156,000. SEEK reported that annual salaries
for oil and gas exploration jobs increased by 13% in 2013 to $158,671.The Hays Oil
and Gas Salary Survey for 2013 found average Australian oil and gas salaries for
permanent staff of US$163,700 pa, the second highest in the survey after Norway.
Higher costs reflect not only wages but also poor productivity.
Tighter environmental regulation has increased costs. A decade ago water produced
with CSG in Queensland could be evaporated. It now generally requires reverse
osmosis. A decade ago gas producers were not expected to pay material amounts in
compensation to land owners. This has now changed. Producers are also expected to
make community contributions, which have totalled $127.5m in Queensland to the end
of 2013.
Supply restrictions mean that potentially low-cost gas cannot be accessed. Gunnedah
and Gloucester gas may be some of the lowest-cost gas on the east coast.
Terms of Reference
APPEAhasaskedEnergyQuesttoundertakeanassessmentofthedegreetowhichoiland
gasexplorationanddevelopmentcostshaveincreasedinrecentyearsandwhathave
beenthemaindrivers.
Concepts
The petroleum industry typically measures costs in terms of finding and development costs
(F&DC) expressed as dollars per barrel of oil equivalent (boe).
F&DC are measured as the total of exploration costs in a year plus expenditure on
developing discovered fields, divided by gross additions of reserves in that year (measured
as boe). Internationally the denominator is Proved reserves (1P) but in calculating
Australian costs we need to use Proved and Probable reserves (2P), which is the Australian
reporting standard.
Using boe as the denominator is a means of combining discoveries of oil, gas and natural
gas liquids (LPG and condensate) on an equivalent energy basis. This is relevant for
conventional gas discoveries, which may also be associated with oil and liquids. Coal Seam
Gas (CSG) is dry, without oil or liquids so F&DC for CSG reflects solely gas costs.
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Because Australia is more gas than oil-prone and because of the interest in gas we have
converted boe to gigajoules (GJ) at 1 boe equals 5.8 GJ.
F&DC should not be confused with break-even production prices. F&DC do not include
operating costs, royalties and taxes or take account of the time value of money. Break-even
production prices are generally at least twice F&DC for a development.
Spending on exploration and development is typically lumpy from year-to-year at the
company level and even at the country level. Reserves are typically booked at the time of
Final Investment Decision (FID), followed by development expenditure, so F&DC may
appear abnormally low at FID and then increase afterwards as money is spent on
development. Reserve additions are also lumpy and it is quite possible to get a fall in
reserves, notwithstanding spending on exploration and development (i.e. a negative
F&DC). To overcome the lumpy nature of expenditure and reserve additions, F&DC are
typically also expressed as a rolling three-year average.
Estimates of F&DC for different companies and jurisdictions are not necessarily
comparable, particularly given the lumpy nature of development and differences in
accounting treatments. The focus of this report is on trends over time, rather than
differences between companies and/or regions.
Drivers of costs
Oil and gas is a global industry and costs reflect global as well as local developments.
There is a global pool of professional labour and development and operating costs reflect
prices charged by global oil services companies and the cost of imported materials.
Although oil and gas supply different markets and prices in energy terms differ, they rely on
the same pool of professional labour and other services. Fluctuations in exchange rates,
especially the A$/US$ also affect costs.
Costs can be driven by cyclical and structural factors. Cyclical costs vary with the oil price,
pace of development and the economic cycle. Structural costs reflect long-run trends such
as deterioration in asset quality over time.
There is no comprehensive and detailed time series of Australian oil and gas industry costs,
let alone one that breaks down costs into various components. However it is possible to
deduce general trends.
Global cost trends

The Australian industry operates in a global cost environment. Figure 1 shows trends in
global F&DC, based on Proved reserves in US$/boe. Globally F&DC have increased sixfold since 2000. Costs peaked in 2007, fell by one-third with the Global Financial Crisis and
then increased again.
Figure 2 shows indexes of global capital and operating costs in the industry. Globally
upstream capital costs have more than doubled and operating costs have nearly doubled
since 2000. The growth in costs follows a similar pattern to the increase in oil prices over
the same period. While the increase in capital and operating costs is not as great as that in
oil prices it does follow a similar pattern except that the fall in oil prices in 2008 and 2009
only moderated the growth in capital and operating costs.
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While capital costs have more than doubled, F&DC have increased even more. This is
because F&DC metrics also capture declining resource quality.
Figure 1 Global F&D costs (US$/boe)
Source: Credit Suisse
Figure 2 Global upstream capital and operating cost and oil price indexes (2000=100)
Globalupstreamcapitalandoperatingcostandoilpriceindexes(2000=100)
450
400
350
300
250
Capitalcost
200
Operatingcost
Oilpriceindex
150
100
50
0
2000
100
Operatingcost 100
Oilpriceindex 100
Capitalcost
2001
102
101
2002
104
103
2003
106
110
2004
109
123
2005
120
132
2006
157
151
2007
188
168
2008
220
179
2009
205
169
2010
206
173
2011
220
182
2012
228
189
85
87
101
133
190
227
253
338
215
278
388
389
Sources: IHS CERA, EIA

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Australian costs
Figure 3 shows rolling three year F&DC for Australia, expressed as A$/GJ, based on ABS
data on expenditure on oil and gas exploration and development and EnergyQuest
estimates of Australian 2P reserves. The rolling 3-year F&DC to 2013 is 5.6 times higher
than that in the three years to 2011. The increase reflects the heavy spending on (and cost
of) upstream field and LNG plant development.
Figure 3 Australia rolling three year finding and development costs, oil and gas, proved and
probable (A$/GJ)
Australiarollingthreeyearfindinganddevelopmentcosts,oilandgas,
provedandprobable($/GJ)
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Series1
2007
2008
2009
2010
2011
2012
2013
1.56
1.18
0.57
0.68
0.75
2.27
4.16
Source: ABS, EnergyQuest
LNG development costs

Figure 4 shows LNG project development costs, expressed as US$ per tonne per annum of
capacity (tpa). The pre-2008 data points are for projects completed in those years in
Australia (NWS Train 5, a brownfield project), Russia (Sakhalin), Indonesia (Tangguh) and
Qatar (Ras Gas). The subsequent data points are for new Australian and PNG projects.
Pluto and PNG are now in production but the other projects are still under construction and
the data points show the timing of cost announcements, both original and revised (rev).
Company cost estimates for the CSG LNG projects are only to first LNG so we have had to
estimate costs post-first LNG (mostly based on company guidance). The estimates all
include upstream costs (typically two-thirds to three-quarters of total cost) plus LNG plant
costs. LNG development costs in Australia are nearly twice as high in US$ terms than a
decade ago, reflecting higher costs for both upstream development and LNG plant
construction.

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Figure 4 LNG project costs (US$/tpa)
LNGprojectcostsUS$/tpa
5000
4500
APLNG
GLNG rev
APLNG rev
QCLNG rev
Ichthys
4000
GLNG
3500
Prelude
Wheatstone
QCLNG
Gorgonrev
Pluto
3000
PNGRev
2500
Gorgon
Sakhalin 2
PNG
2000
1500
1000
RasGas
Tannguh
500
0
2004
NWST5
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: EnergyQuest
Figure 5 Greenfield Australian and PNG LNG project development costs (A$/tpa)
GreenfieldAustralianandPNGLNGprojectdevelopmentcosts$A/tpa
5000
4500
APLNG rev
APLNG
GLNG rev
4000
QCLNG rev
Ichthys
QCLNG
GLNG
3500
Gorgonrev
Prelude
Wheatstone
Gorgon
3000
Pluto
PNG
PNGRev
2500
2000
1500
1000
500
0
2008
2009
2010
2011
2012
2013
2014
Source: EnergyQuest

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Costs in US$ are the focus for companies making investment decisions and this is affected
by currency fluctuations, primarily the appreciation of the A$ in the case of Australian LNG
projects. Figure 5 also shows data points for Australian and PNG LNG projects in A$/tpa.
Comparing the same projects between 2009 and 2013, the cost increase in A$ is
approximately 33%.
Offshore domestic F&DC

Figure 6 shows development costs for offshore domestic gas projects in A$/GJ of 2P
reserves by date of first production. A decade ago offshore domestic gas projects could be
developed for less than A$1.00/GJ of 2P reserves. Costs are now up to A$3.00/GJ, a threefold increase. Offshore Western Australia, the John Brookes field, which came into
production in 2005, cost $300m to develop 1,200 PJ of 2P reserves ($0.25/GJ). The
Macedon field, which came into production in 2013, cost $1,600 to develop 570 PJ of 2P
reserves (2.82/GJ), a more than 11-fold increase in development cost per unit of reserves.
Development of the Greater Western Flank for the North West Shelf (LNG and domestic
gas) now costs A$2.10/GJ compared with the cost of developing the North Rankin field,
which was A$0.95/GJ.
One driver of higher costs is lower field quality. Development of the Macedon gas field
required a broadening of the Western Australian gas specification. New developments
offshore Gippsland are prone to mercury and CO2, which require treatment, adding to
development costs. Fields are also less likely to contain higher-priced oil, condensate or
LPG. If the Sole field is to be developed offshore Gippsland it will be necessary to treat H2S.
Figure 6 Offshore domestic gas development costs A$/GJ of 2P reserves
Offshoredevelopmentcosts$/GJof2Preserves
3.50
KipperRevised
3.00
Macedon
2.50
Yolla
Reindeer
2.00
Kipper
$/GJ
Henry
1.50
Thylacine
1.00
Minerva
Casino
0.50
Longtom
EastSpar
JohnBrookes
0.00
1993
1998
2004
2009
2014
2020
Source: EnergyQuest

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Queensland F&DC
Figure 7 shows Queensland F&DC, including CSG and the Queensland sector of the
Cooper Basin. F&DC have increased from an average of A$0.83/GJ in the three years to
2011 to A$5.37/GJ in the three years to 2013, a 6.5-fold increase. Costs were low when
companies were mostly in the exploration phase but have jumped significantly with
development underway.
Figure 7 Queensland finding and development costs (A$/GJ)
Queenslandfindinganddevelopmentcosts(A$/GJ)
10.0
9.0
8.0
7.0
6.0
5.0
Rolling3year
AnnualF&DC
4.0
3.0
2.0
1.0
0.0
Rolling3year
AnnualF&DC
2009
2010
0.26
0.41
2011
0.83
3.00
2012
2.26
8.88
2013
5.37
5.70
Source: ABS, Qld DNRM
Eastern Australia F&DC

Santos discloses exploration and development expenditure for Eastern Australia (defined
as Queensland excluding GLNG, South Australia, NSW, Victoria and Central Australia).
This makes it possible to calculate F&DC excluding east coast LNG. F&DC have increased
from A$1.76/GJ in the three years to 2011 to A$3.15/GJ in the three years to 2013, almost
a two-fold increase (Figure 8). If Santos is unable to develop its NSW reserves its F&DC
will increase to A$4.21/GJ to 2011 and A$5.88/GJ to 2013.

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Figure 8 Santos rolling three year finding and development cost, eastern Australia ex-GLNG
(A$/GJ)
Santosrollingthreeyearfindinganddevelopmentcost,easternAustraliaex
GLNG(A$/GJ)
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
IncludingNSW
ExNSWreserves
2011
1.76
4.21
2012
2.22
3.76
2013
3.15
5.88
Source: Santos
Cost drivers
Exploration costs
Higher exploration costs are an important driver of higher F&DC. Figure 9 shows
exploration expenditure in South Australia (mostly Cooper Basin) and Queensland divided
by wildcat and appraisal exploration wells drilled. Exploration expenditure includes costs of
seismic and drilling and associated costs. A decade ago the average exploration cost in the
Cooper Basin was $2-3m per well. It has since doubled, notwithstanding more efficient
drilling practices. If the average find is also smaller, the increase in finding costs is even
greater.
The Queensland numbers are a mix of conventional Cooper Basin wells and CSG wells.
The decline in average cost in 2007 and 2008 reflects the growing number of cheaper CSG
wells, which dominate drilling from 2008. The average exploration cost has increased from
less than $1.0m per well in 2008 to almost $3.0m in 2013.
Figure 10 shows average exploration cost per well for offshore Western Australia. Over the
last decade there has been a steep increase in costs from $10m per well to $90m. This
reflects higher rig rates and more challenging drilling.

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Figure 9 Average exploration cost per well, onshore ($m)

Averageexplorationcostperwell,onshore($m)
7.0
6.0
5.0
4.0
SouthAustralia
Queensland
3.0
2.0
1.0
0.0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Sources: ABS, APPEA, Qld DNRM
Figure 10 Average exploration cost per well, offshore WA ($m)

Averageexplorationcostperwell,offshoreWA($m)
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Sources: ABS, APPEA
Field and plant investment

Cooper Basin
Santos is expanding the capacity of the Moomba gas plant from 430 TJ/d (Moomba and
Ballera combined) to up to 600 TJ/d over 2014 to mid-2017 at a cost of up to $800 million
gross. This includes an extra 1 Mtpa CO2 removal train. Plant reliability is also being
improved. Total capital expenditure is expected to peak in 2016. Long term stay-inLevel 30 91 King William St Adelaide SA 5000
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business capex is expected to be ~$500m pa net to Santos, of which ~$100m is oil and
~$400m gas, to develop the 2P reserves. The company is working on reducing costs,
targeting a 25% reduction in drilling costs by 2015.
The Cooper Basin has 1,800 PJ of conventional 2P reserves, 15 years reserve life at a
production rate of 120 PJ/a. If stay-in-business capex is $600m gross pa ($400m net), that
implies an average development cost of $5/GJ, to which has to be added operating costs,
taxes and royalties and a profit margin. Anecdotal evidence is that current infill drilling is
marginal economically, even at current higher gas prices.
Bass Strait
The $4.5 billion Kipper-Tuna-Turrum project commenced production in June 2013, with gas
production from the Tuna field and oil production from Turrum. The project will help
maintain (not increase) current Bass Strait production levels. The Tuna reservoir, which has
been producing oil for many years, has been further developed to produce additional gas
and associated liquids from the field. This has been done by converting existing West Tuna
facilities, and also using new pipelines to deliver production into the existing gas system.
The Turrum field holds approximately 1 Tcf of gas and 110 MMbbl of oil and gas liquids. A
new platform, Marlin B, has been constructed and linked by a bridge to the existing Marlin A
platform. Gas associated with the production of oil from Turrum will be re-injected until the
new US$1,040 Longford Gas Conditioning Plant comes on line in 2016.
The Kipper field holds approximately 620 Bcf of recoverable gas and 30 MMbbl of
condensate/LPG. It is located in 100 m of water, approximately 45 km off the Gippsland
coast. Facilities for the Kipper field are complete and include subsea wells, coolers and a
manifold. The produced gas and condensate will be transported via a new looped pipeline
laid on the seabed to the existing West Tuna platform. Two new pipelines, one from West
Tuna to Marlin and another from Marlin to Snapper have been installed for Kipper
production and development of the Tuna gas cap. Development was sanctioned in
December 2007. First gas from the field is delayed beyond the previous expectation of the
first half of 2012 and is now expected in H1 2016 following the installation of mercury
removal facilities.
The overall cost of the project is approximately $5.6 billion to develop 400 MMboe of oil and
gas, with a development cost of $14/MMboe or $2.45/GJ, notwithstanding that the
development will only maintain, not increase production through the existing Longford plant.
We estimate that the break-even gas price for Kipper as a stand-alone development is
$7.45/GJ due to the project delays and need for mercury treatment.
Deteriorating field quality
The best oil and gas fields are developed first and development then moves to higher cost
fields if commercially viable. Figure 11 shows estimates of the east coast gas cost curve
(breakeven prices). The large bulk of east coast resources are estimated to have a breakeven price of over $5/GJ, increasing to over $9/GJ.

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Figure 11 Aggregate gas supply for the east coast for 2018 ($/GJ)
Source: Simshauser and Nelson (2014)
Cost of materials
There have been significant increases in the cost of materials. The price of Hot Rolled Coil
steel ex-Asia, used for tubulars and gas transmission pipelines, increased from around
US$200/tonne in the early 2000s to over US$700/tonne in 2011. Prices have since declined
(in US$ terms) to around US$500/tonne but they are still significantly higher than during the
2000s.
Figure 12 shows steel sheet rather than steel coil but it shows the same pattern.
Simshauser, Paul; and Nelson, Tim (2014), Solving for x- the New South Wales Gas Supply Cliff. AGL Applied
Economic and Policy Research. Working Paper No. 40.

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Figure 12 China domestic hot rolled steel sheet (US$/t)

Chinadomestichotrolledsteelsheetspotaverageprice
900
800
700
600
500
400
300
200
100
0
9/10/2009
9/04/2010
9/10/2010
9/04/2011
9/10/2011
9/04/2012
AUD/metrictonne
9/10/2012
9/04/2013
9/10/2013
9/04/2014
USD/metrictonne
Source: Bloomberg
Labour costs
High Australian labour costs are one of the drivers of higher costs. Figure 13 shows some
examples of high costs quoted at the 2014 APPEA Conference. It compares costs incurred
on Apaches current Brunello development with costs for the 2007 Angel, 2009 Pluto and
2010 Reindeer developments. Salaries have increased by 44-49%.
Bechtel has quoted earnings of $3,000 per week for special class welders, the equivalent of
$156,000.
Incitec has said that it will cost around $1 billion to build its new ammonia plant in the US
compared with $1.4 billion in Australia. Labour costs would be 35% of the total project in the
US compared with 60% in Australia.
Under the enterprise bargaining agreement (EBA) applying to one upstream CSG
development in Queensland a fly-in-fly-out trades assistant working earns around $40 per
hour, itself high. However with overtime and other allowances this can be leveraged to
$160,000 a year.
In August workers on Curtis Island voted to accept a new EBA. The previous EBA expired
in June this year and had to be renegotiated, while the projects are still under construction.
Bechtel made an offer, now accepted, of a 13% pay increase and an ultimate shift from a
4on/1off roster to a 3on/1off roster, all potentially increasing costs. While Bechtel bears
labour cost risk, this all adds to project costs.
The Australian Financial Review reported (28 January 2014) that an unskilled labourer
could earn a starting wage of $180,000 a year under the greenfield EBA applying to
construction of the gas conditioning plant at Longford.

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Figure 13 Offshore construction annual salary including superannuation
Source: AMMA
SEEK reported that annual salaries for oil and gas exploration jobs increased by 13% in
2013 to $158,671.
Higher costs reflect not only wages but also poor productivity. According to Shell, Australian
oil industry workers are paid approximately 130% of the American Gulf Coast benchmark
and Shell has called for a focus on eliminating unproductive clauses in enterprise
agreements to maximise effective hours at work. Shell quotes a case of having to pay for
700 hours of work but only getting 500 hours due to restrictive practices. Shell also believes
that greenfield industrial agreements should hold for the full term of a project.
It is not only workers under EBAs that are expensive. So are non-unionised industry
professionals. The Hays Oil and Gas Salary Survey for 2013 found average Australian oil
and gas salaries for permanent staff of US$163,700 pa, the second highest in the survey
after Norway. In 2013 average Canadian salaries were US$130,000 and US salaries
US$111,800.
In the salary survey of SPE members, median total compensation in Australasia in 2013
was US$195,952, the highest in the world, up by 11.7% from 2010 and by 6.4% from 2012.
(The average wage increases in the total Australian workforce in 2013 was 2.5%.) Median
2013 compensation of SPE members in the US was US$192,600 and average Canadian
compensation was $161,750.
Figure 14 shows salaries from the Hays and SPE surveys in A$.

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Figure 14 Oil and gas industry salaries

Oilandgasindustrysalaries(A$)
250,000
200,000
150,000
SPE
Hays
100,000
50,000
0
2008
2009
2010
2011
2012
2013
Sources: SPE, Hays
Regulation and community benefits

Tighter environmental regulation has also increased costs. For example, a decade ago
water produced with CSG in Queensland could be evaporated. It now generally requires
reverse osmosis.
Environmental regulation is being rationalised between the federal and state governments
and in Queensland.
The repeal of the carbon pricing mechanism in July removes a cost facing LNG exporters
and gas producers generally.
A decade ago gas producers were not expected to pay material amounts in compensation
to land owners. This has now changed. Producers are also expected to make community
contributions, which have totalled $127.5m in Queensland to the end of 2013.
Supply restrictions
Supply restrictions mean that potentially low-cost gas cannot be accessed. Gunnedah and
Gloucester gas may be some of the lowest-cost gas on the east coast. In Victoria Lakes Oil
is offering gas from onshore fields for $5.25/GJ but is prohibited from drilling. However with
restrictions on drilling in NSW and Victoria it is not possible to form a definite view about
production costs in those states.
Opponents of CSG development in NSW do not believe that restricting gas supply will
increase gas prices. The nub of the argument, from The Australia Institute and others is that
east coast Australian gas prices will be set completely by global prices and the only thing
that will affect local prices is changes in global prices. This argument has some validity in
the case of commodities traded in deep global markets like oil. Discovering more oil in Bass
Strait would be unlikely to reduce east coast petrol prices. However, gas is quite different to
oil or petrol. Primarily due to the greater difficulties of transporting gas, there is nothing like
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17
a liquid global market in gas of the kind there is in oil. Around 60% of oil is traded globally
but only 10% of gas is traded as LNG. Any oil produced in Australia can be readily sold on
the global market. That is not true of gas. It is not the case that any additional gas produced
on the east coast can be sold as LNG. Moreover both AGL and Santos have said that any
gas they produce in NSW will only be sold into the local market (the first 100 TJ/d in the
case of Santos). Accordingly the price of NSW gas will be determined by its cost, the price
of alternative Victorian gas supplies and the price of energy substitutes such as coal.

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ABN 18 503 484 404 ACN 139 665 295
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EnergyQuest APPEA Cost Report - 20141101 - Final

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EnergyQuest APPEA Cost Report - 20141101 - Final

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Oil and Gas Industry Cost

An independent report prepared by EnergyQuest

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Global cost trends

Source: Credit Suisse

Sources: IHS CERA, EIA

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Source: ABS, EnergyQuest

LNG development costs

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Figure 4 LNG project costs (US$/tpa)

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Offshore domestic F&DC

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Source: ABS, Qld DNRM

Eastern Australia F&DC

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Figure 9 Average exploration cost per well, onshore ($m)

Sources: ABS, APPEA, Qld DNRM

Figure 10 Average exploration cost per well, offshore WA ($m)

Sources: ABS, APPEA

Field and plant investment

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Source: Simshauser and Nelson (2014)

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Figure 12 China domestic hot rolled steel sheet (US$/t)

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Figure 13 Offshore construction annual salary including superannuation

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Figure 14 Oil and gas industry salaries

Sources: SPE, Hays

Regulation and community benefits

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