Source: Chevron Australia Pty Ltd.

Australian Commodity Powerhouse Faces Post LNG Investment Slump

  • Completion of Gorgon project dampens West Australian outlook
  • Value of project investment falls to lowest level since 2008

The startup of Chevron Corp.’s mammoth $54 billion Gorgon gas export plant last year has left Western Australia grappling with a slowdown as a decade-long investment bonanza subsides.

The value of projects in Western Australia, home to the nation’s largest conventional gas reserves, has slumped to its lowest since the financial crisis in 2008, according to consultant Deloitte Access Economics. Projects being built in the state were worth A$64.7 billion ($51.3 billion) at the end of June 2017, a 46 percent decline from a year earlier.

The completion of Gorgon, the largest resource development in Australia’s history, has “weighed heavily” on investment with engineering construction now accounting for less than 10 percent of the state’s economic value compared with more than 20 percent during the peak of the mining boom in 2012. Chevron’s Gorgon project off northwest Australia employed more than 10,000 people at its peak, project director Jeff Brubaker said last year.

“The fall in mining investment has cast a shadow over broader economic activity in Western Australia,” said Deloitte Access Economics partner Stephen Smith. The completion of Chevron’s $34 billion Wheatstone project in 2018 will lead to further falls in engineering construction in the short term for the state, according to the report.

The investment decline shows the challenge for resource-rich Australia to lock in a new wave of LNG projects amid a muted outlook for the super-cooled fuel. A glut of production capacity from countries including Australia, Qatar and the U.S. has helped drive down spot prices by about 70 percent since February 2014. No company has sanctioned a major new green-field LNG development since late 2013.

Australia’s economic expansion has been hamstrung by the unwinding of mining investment in the past few years. The central bank, which has slashed interest rates to a record-low 1.5 percent to help smooth the handover to services and manufacturing, predicts the drag from falling investment should end this year.

The Reserve Bank of Australia’s rate cuts were designed to spur residential construction to provide employment for former mine workers and help address the housing shortage in parts of Australia. While it did that, easy policy also triggered a borrowing binge among property investors that sent prices sky-rocketing in Sydney and Melbourne and forced the banking regulator to introduce curbs on lending.

The RBA has kept rates unchanged since August -- showing a willingness to tolerate weak inflation in order to avoid further inflaming east coast house prices via further easing. 

This year, the country’s labor market has begun to strengthen; indeed Western Australia, the crucible of the resource investment bonanza, actually generated the most jobs among any state last month. That suggests the worst effects of falling investment may now have passed.

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