The $150 billion mirage

Reading the papers this week you’d be forgiven for thinking that $150 billion has been ripped from our national coffers, helped along by the Prime Minister, ‘eco-activists’ and vast quantities of red and green coloured tape.

In submissions and presentations at senate inquiries in recent months, I’ve argued that industry claims about red and green tape are overstated. Rather, it’s market forces that ultimately determine the profitability of operations and desirability of investment. Not surprising really.

So when the news this week was dominated by talk of the $150 billion of cancelled projects and this was attributed to Government ineptitude, red tape and green tape, I decided to read the BREE report where this figure came from, Resources and Energy: Major Projects – April 2013

Table 7 of the report lists 18 projects that have been delayed or cancelled in the last 12 months with a combined capital valuation estimated at $148.8 billion. Sounds bad until you realize that these projects were only ever at a feasibility stage.

The fact that these projects have been delayed or cancelled simply reflects that fact. Nevertheless, I decided to look into each project and see what caused the delay or cancellation. Here’s what I found.

Browse LNG – Woodside (estimated value $36 billion)

This project was altered because in the words of Woodside, "[The decision] is driven by commercial risk and reward considerations and the proposed concept doesn't provide the economic return required to proceed with the project”.

Woodside is now assessing the potential to use offshore floating processing platforms and when the announcement to cancel plans for onshore processing was made, Woodside’s share price went up.

Outer Harbour – BHP Billiton (estimated value $30 billion)

BHP has put this project on the backburner due to falling profits and declining mineral prices. The company is still looking at a smaller expansion of the facility.

Olympic Dam Expansion – BHP Billiton (estimated value $20 billion)

In an announcement to shareholders, BHP said that the expansion would not be prudent use of shareholder capital at this point due to declining commodity prices and rising costs. BHP is exploring smaller scale and higher return options for expansion.

Sunrise LNG – Woodside (estimated value $12 billion)

This one is genuinely in a tight spot and is a curious combination of economics, business and politics. This is a joint project between a consortium led by Woodside, the Australian government and the East-Timorese government. Woodside is obliged to maximize shareholder returns and so wants to use floating platforms.

The East-Timorese Government, however, would prefer onshore processing so that the fledgling nation can capture more of the benefits (beyond just royalties) from the extraction and export of the natural gas resource. The Australian government is uncomfortably caught in the middle.

Abbot Point T4–9 – NQBP and Partners (estimated value $11 billion)

The state government led by Campbell Newman cancelled this project. It was deemed too big and unnecessary in the short term.

West Pilbara Iron Ore – Aquila Resources (estimated value $7.4 billion)

This project has been shelved due to funding difficulties and disagreement between project partners.

Wandoan coal mine – Xstrata (estimated value $6 billion)

Xstrata are yet to make investment decision and at least part of the reason is the Glencore merger. Glencore are on record saying they dislike greenfield projects due to higher risks.  This project also faced strong local opposition from farmers over concerns about groundwater impacts.

Kooragang Island Coal Terminal – PWCS (estimated value $5 billion)

Reduced coal exports have negated need for such a large expansion in terminal capacity.

Anketell Point Port – Fortesque/Aquila Resources (estimate value $4 billion)

Federal approval granted subject to 45 conditions but project delayed due to proponent disputes over the final nature of the port project. Some sources also claimed funding difficulties in early 2013.

Cape Lambert Magnetite project – MCC Mining (estimated value $3.7 billion)

Although early media reports mentioned the MRRT was to blame, the real reason the project was cancelled was due to falling commodity prices and rising costs for what is a large and remote project. Specifically, the cost of labour, the cost of electricity, water and railway construction all led to difficulties with the project.

Southdown Magnetite Project – Grange Resources (estimated value $2.9 billion)

Low iron ore price, rising costs and 'difficult' financial markets led to the project being delayed.

Yarwun Coal Terminal – 3tl / Metro Coal (estimated value $2.2 billion)

Last news surrounding this project was that an EIA was being prepared after the project was referred under EPBC Act.

Mount Pleasant Coal Mine – Rio Tinto (estimated value $2 billion)

Postponed by Rio Tinto while it focuses on West Australian assets. Plans to mine at some point in the future when market conditions improve.

Weld Range iron ore project – Sinosteel Midwest (estimated value $2 billion)

Cost blowouts and concerns about the Oakajee port and rail development led to the proponent putting the project on hold for an unspecified time.

Balaclava Island Coal Terminal – Glencore/Xstrata (estimated value $1.5 billion)

Glencore has cancelled project saying that market conditions are poor and sufficient port capacity already exists.

Fisherman’s Landing LNG – LNG Limited (estimated value $1.1 billion)

I couldn’t find much information on this project. Not sure if it’s been delayed or cancelled.

Surat Basin Rail – Aurizon / Xstrata (estimated value $1 billion)

Progress on this project has slowed down due to market conditions and issues with land acquisition.

Wilkie Creek Coal Mine – Peabody Energy (estimated value $1 billion)

Expansion plans on hold as Peabody is attempting to sell the mine.

So what can we learn from all this? Most of these decisions seem to have been made for very prudent commercial reasons.

The RBA commodities indices for base metals and bulk commodities demonstrate the significant price drop-offs in the last 24 months that have been a big part of the reason for delayed or cancelled projects. Base metals have fallen by 26% from a high in February 2011 and bulk commodities by 28% from a high in November 2011.

Considering the projects above were nearly all only in a feasibility stage to begin with, this is a simple case of counting our chickens before they’d hatched.

The shareholders of most companies should be glad, as should other projects competing for capital and other inputs. As for Australians, the minerals will remain in the ground and available for future use.

Tristan Knowles is an economist from Economists at Large in Melbourne.

To keep up to date with Australian Mining, subscribe to our free email newsletters delivered straight to your inbox. Click here.