The USD29 billion Wheatstone liquefied natural gas (LNG) project is a key part of Chevron’s (NYSE: CVX) ongoing effort to shift its focus away from North America and Europe and toward Asia. The San Ramon, Calif.-based Super Oil recently announced an agreement with joint venture partners Apache Corp (NYSE: APA) of Houston, Kuwait Foreign Petroleum Exploration Company, or Kufpec, and Royal Dutch Shell Plc (RDS.A), that will lead to the creation of an estimated 6,500 jobs and generate perhaps AUD20 billion in government revenue.
Wheatstone is actually just the second-biggest Chevron LNG project Down Under, as the company has already committed USD43 billion to the Gorgon project, also on Western Australia’s Pilbara Coast. Chevron hopes to award AUD3 billion in local contracts over the next three months. Construction of the LNG processing plant at Onslow, 900 miles north of Perth, will start soon, and its first exports are scheduled for 2016.
Australia surely felt others’ pain from 2007 to 2009, but it’s the only developed economy that didn’t sink into the great recession. Like Canada, its vast resource base gives the country emerging-market-like characteristics. Stable institutions and Western-style transparency make the Land Down Under an attractive destination for investors seeking relatively high, relatively safe income.
Although it’s not tied to any one particular commodity in the way the Canadian dollar trades with crude oil, the Australian dollar is nevertheless rooted in the coal, iron ore, natural gas and other minerals and resources found there in abundance. And like the loonie, the aussie is underpinned by sound fiscal and monetary policy.
Australia’s net debt-to-GDP ratio was 5.53 percent as of Dec. 31, 2010, much lower than figures found in the US, Great Britain and Japan, for example. And the Reserve Bank of Australia’s target overnight interest rate as of the central bank’s last policy meeting is 4.75 percent.
Should current economic conditions devolve into another run of negative global growth, budget discipline by Australia’s federal government and sensible interest-rate policy from its central bank leave room to open spigots for legitimate countercyclical spending that won’t spell long-term disaster and to bring down borrowing costs, to help businesses and consumers, should the need arise.
The key to Australia’s long-term growth is its resource base. Australia is the largest provider of basic commodities needed to run the economies of China, India and Japan. The latter continues to suffer from the aftershocks of this year’s combination earthquake and tsunami, which killed more than 20,000 people. But it’s still sucking down large amounts of Australian energy, particularly as so much of its nuclear power fleet has been taken down.
Meanwhile, trade with the Middle Kingdom remains robust, and commerce with fellow English-speaking democracy and Commonwealth country India is only beginning to pick up steam.
The value of Australia’s resources and energy exports reached a record in 2010-11 because of higher commodity prices driven by Asian demand. According to the Bureau of Resources & Energy Economics, exports of coal, iron ore, gold, natural gas and other commodities grew 27 percent year over year to AUD175 billion, 9 percent above the previous record, AUD160 billion, set in 2008-09. The mining sector now accounts for some 59 per cent of the country’s total goods and services exports.
International energy companies have committed more than USD100 billion to develop natural gas reserves off Australia’s northern coast and trapped stores of methane in eastern Queensland state’s coal seams. If all goes according to plan Australia could surpass Qatar as the world’s biggest LNG exporter by 2020.
Work on other, non-LNG resource projects continues apace, too.
Australia’s Bureau of Resources and Energy Economics (BREE) has forecast that iron ore exports will increase over the next six years by 7 percent per year to 600 million tonnes, up from about 408 million tonnes in the 12 months ended Jun. 30, 2011. Major Australian miners are currently expanding existing mines, and other companies, such as China’s CITIC Pacific, are planning new mines in the Pilbara.
Iron ore export capacity is expected to be boosted by about 75 percent to at least 815 million tonnes by December 2016, driven by an estimated AUD37 billion worth of projects with secured funding, including expansions of mines operated by BHP Billiton Ltd (NYSE: BHP), Rio Tinto Ltd (NYSE: RIO) and Fortescue Metals Group Ltd (FSUMF.PK). Other estimates place spending at AUD85 billion Australia-wide, an effort that would double current capacity of 465 million tonnes to 1 billion by the end of 2016.
Efforts continue to get Australia’s coal production back up to speed, as a combination of devastating floods that hurt operations and weaker-than-forecast economic conditions around the world have reduced volumes and revenues.
Coal is still Australia’s largest export. The industry is still trying to recover after massive open-cut mines were flooded early in 2011. July trade data showed that coal exports fell 12 percent, or AUD535 million, compared with June.
The major variable here, apart from the still remote threat of eurozone crisis leading to another global meltdown, is costs, particularly in light of the emerging competition for workers and equipment. Woodside Petroleum Ltd (WOPEF.PK), for example has already reported a USD880.5 million cost overrun at its Pluto LNG project northwest of Karratha, Western Australia, in the Northern Carnarvon Basin.
The scale of the commitments and the shape of consumption patterns coming from Asia strongly suggest many if not most of these projects will get built. Australia is home to several companies that will benefit from the billions in contract awards due to flow over the next decade.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
