While integrated oil and gas projects in Australia represent one of the largest growth areas in ConocoPhillips’ (NYSE: COP) vast global portfolio, rising cost structures have made investment in future projects more challenging, said Joe Marushack, ConocoPhillips president of Asia-Pacific and Middle East, speaking at the recent Australian American Chamber of Commerce Energy Conference in Houston.

“There is a lot of opportunity to grow in Australia,” he said, primarily around liquefied natural gas (LNG) projects. “But I can tell you the Australia projects are very expensive, and they are challenged,” Marushack said.

ConocoPhillips is currently developing three major projects on the continent: conventional offshore exploration in the Timor Sea; unconventional onshore exploration in Western Australia’s Canning Basin; and coalseam-gas-to-LNG at Curtis Island. Actual costs for these projects are coming in higher than the original final investment decision’s (FID) estimated costs, he said.

“That’s for all the big projects out there,” in addition to Conoco’s, he said. “It’s not so much the percentages, which are small, but these are capital-intensive projects, and an overrun of 10% might be $2 to $3 billion. That's a lot of money.”

“We’ve got to do a better job of working through these issues in the future.”

Landed costs for Australian LNG projects fall at about $12 per thousand cubic feet equivalent (Mcfe) of gas, he noted, some 20% to 30% higher than in other countries. Citing the IMD World Competitiveness Center, he illustrated that Australia is ranked 16th on global competitiveness, which measures competition for labor, regulation and project capital intensity, among other things. The country has fallen from fourth in 2004.

Alluding to recent taxation and regulatory changes, Marushack said, “We’ve got to do a better job of working with governments so they understand what are the risks, and that they can understand what regulations need to be so we can minimize the costs and chance for these overruns.”

Just because a country has reserves doesn’t mean that equals development, he said. “You’ve got to have a stable fiscal and regulatory regime to attract investment, and we’ve got to improve on some aspects of that in Australia. We have to have laws that promote investment.”

Efficiencies could also be better, and he emphasized the importance of oil and gas companies working in tandem. As an example of wasted capital dollars, he pointed to three separate LNG export facilities being built simultaneously on Curtis Island, each with two liquefaction trains.

“You can imagine the efficiencies and cost reductions that were possible if these three projects were combined into one six-train project. We work in a competitive industry; sometimes it’s tough to get on the same page.”

But other countries, like Qatar, force the issue, he said. “The government decides who your partners are and how you’re going to build the project. It’s very efficient. The industry doesn’t like it, but it’s an efficient way to do business.”

One way he sees improving efficiencies going forward in Australia is to utilize brownfield projects where some infrastructure already exists. Conoco’s producing Darwin LNG facility on the northern coast is permitted for 10 metric tons per annum (mtpa), with only 3.5 mpta being produced now. Its Australia Pacific LNG project on Curtis Island can accommodate two additional trains.

“We’ve got to find a way to bring projects into these areas to reduce the overall costs and take advantage of that infrastructure. We can leverage operations in the best practices.”

Currently, ConocoPhillips produces approximately 60,000 barrels of oil equivalent a day (BOE/d), net, in Australia. This figure will double when Australia Pacific LNG comes online beginning next year. Large projects, such as these, take seven years from discovery to development, said Marushack.

All of the company’s current Australian projects in motion will be seen to completion, he said. But future ones will depend on the company’s ability to drive down costs to be competitive with other portfolio opportunities.

“We can develop this next wave of LNG projects, and we need to be doing it now. We just need to build on these lessons recently learned.”