The West

He runs one of the world's biggest LNG producers but what keeps Woodside Petroleum managing director Peter Coleman awake at night is not the Henry Hub gas price or China's economic prospects.

It is a deep concern about rising costs in the Pilbara.

And, in a sobering message to his rival LNG players and coinciding with a visit to WA by a group of big-ticket shareholders in US giant Chevron, Mr Coleman says he is not yet ready to call the top of the inflationary cost cycle.

In fact, he says, it could be another two to three years before there is evidence that the Pilbara's most dramatic cost cycle uptick in living memory has plateaued.

The warning by Mr Coleman comes despite thousands of Pilbara jobs going begging in recent months as iron ore miners such as BHP Billiton and Fortescue Metals Group axe new projects.

"While you are seeing some of the companies may pause today on their particular projects, the reality is that there are those already in train, those who are in their first third of development that are going to continue to drive that momentum up for the next two to three years," Mr Coleman says. "The question is when will it peak?"

Mr Coleman says the plethora of LNG projects in construction around Australia, including the Chevron-led $43 billion Gorgon and $29 billion Wheatstone developments in the Pilbara and $60 billion of ventures in Queensland, means "inertia" to a much-needed fall in costs, particularly in WA.

"Today is probably a period of time when the cost versus (LNG) price element, the margin is as skinny as it has ever been, or at least for a long period of time, for new projects," he says.

And, in a thinly veiled attack on rivals such as Chevron, Inpex and Santos - although he will not name individuals - Mr Coleman points to the LNG inexperience of some players and hints that budget and timetable challenges will be unavoidable, which in turn will add further pressure to the high-cost environment.

"My concern is, and what keeps me awake at night, is what is happening in the industry here because we have an unprecedented number of projects all moving along the pipeline at the same time and it is a mix of companies, some of whom have been in LNG before, most of whom have not," he says.

"And now they are going through their own learning cycles and will do what they need to do to protect their business, and that worries the hell of out me. Because I am Australian-based, I am Western Australian-based, I am not a portfolio player, this is my home and the behaviours around those projects . . . that is what concerns me, to be frank."

Mr Coleman is talking from Woodside's own experience. Its Pluto LNG project was completed early this year, almost 1 1/2 years late and 25 per cent over budget, with a final cost of $15 billion that prompted some analysts to question the venture's viability.

Few outsiders picked up on Pluto's construction challenges even when reports surfaced in 2009 that Woodside was rushing extra workers to the Burrup Peninsula site to make up on timetable slippages, in the process increasing the overall cost. Described since by Woodside as problems sparked by below-budget productivity, analysts have responded by taking a closer look at the progress of subsequent LNG developments, led by Gorgon which is approaching the halfway point of its construction cycle.

Chevron has already warned its investors it is facing extreme headwinds at Gorgon, its joint venture with ExxonMobil and Royal Dutch Shell, and most expect a similar story at Wheatstone. Inpex and Santos, meanwhile, are first-time operators at a time of intense industry cost pressure.

"The companies we are talking about are large enough that they will continue through the construction phase," Mr Coleman says.

"They may not get the returns initially but they will continue through the construction phase. They won't like it, they won't spend a dollar more than they have to but they will spend what they need to keep the project going."

Post-Pluto, Woodside's future remains greatly influenced by the high-cost construction environment. By the second quarter of next year, Woodside and its partners in the Browse LNG project have to be in a position to make a final investment decision on the contentious development, in line with permit retention conditions imposed by the Federal and WA governments.

Right now Woodside is digesting tenders for the on and offshore components of a project analysts expect to cost at least $40 billion.

"The best you will ever get on lump sum is about two thirds," he says. "There's still a large percentage that is variable so how confident are we that we can deliver on that because margins are skinny."

Mr Coleman deflected questions about whether Woodside had asked the governments for another extension to next year's FID deadline.

But he says he is delighted with this year's Browse equity shake-up, which has seen Japan's MIMI become a partner, Shell increase its stake, and Chevron quit.

"I have now got a motivated joint venture to get this thing moving," he says. "There's probably a little minority one (8.3 per cent partner BHP Billiton) down the bottom who is still working out their capital program but, the reality is, they're a minority partner. You now have a joint venture that has enough large stakes. Now we have got a better alignment."

The West Australian

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