Darwin: Could it all go wrong?

by Aidan Devine30 Jul 2013

With the construction of processing facilities for the $34bn Inpex Ichthys LNG project almost entirely responsible for recent price pressures on Darwin’s housing market, the big issue for investors is going to be what happens in 2016 when the building of the facility is completed.

According to Deloitte Access Economics’ latest Business Outlook report, the sheer scale of the project means that a major shift in the Darwin economy is going to be inevitable when construction of the project is finished. “Data suggests that this project accounts for over 90% of the spend on major engineering construction underway in the NT. That’s a very big egg in a fairly small basket,” the report says.

It adds that there are already tentative signs that the gas industry is going to face steep challenges, compounded by a weakening employment market. The construction phase of any major project tends to have the highest labour obligation and this natural decline in jobs will occur as the project shifts into its operational phase.

“Gas projects are dominating the investment landscape in Australia at present… However, a transition is approaching with the bulk of those investment projects being currently underway, with far less in the pipeline to potentially replace them,” Business Outlook claims.

The gas investment pipeline is being setback, the report says, because coal-seam-gas producers face mounting extraction costs, community opposition and regulations. These have combined to erode the profitability of Australia’s gas exports.

“[Gas] projects are generally underpinned by gas contract prices which have been agreed in recent years. But prices have been changing of late … And with US gas production steaming along thanks to the leaps-and-bounds improvement in shale gas technology, there may be some destabilising price movements to come.

“So far due to government regulations and a lack of infrastructure, only a very small amount of US LNG is exported to the Asian markets that make up Australia’s biggest customers. However, while these price differentials remain there will be an incentive for US producers to access these markets. The implication for Australian producers is that there is a possibility that the contract prices some operators have managed to lock in may not be so generous in the future.”

The property market

Changes in the international gas arena should be significant for the Darwin employment market – which has been boosted and supported by big gas projects of late. Without a stream of major projects bringing in new workers to the city and, by association, increasing property prices, the potential returns and capital growth that investors get on Darwin purchases will be significantly affected. 

 

 

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