Why It's Good to Be Last Into a Big Petro-Play

Interesting note from Platts this week about new research on one of the biggest natural gas plays on Earth.

That's Australia's liquefied natural gas (LNG) sector. A multi-billion dollar business where new data is showing that being a first mover isn't always an advantage.

One of the latest massive LNG projects being advanced here is the 8.4 million tonne/year Ichthys project. A venture between Japan's Inpex and major E&P Total.

Construction of the Ichthys project is now about 50% complete. With the developers having so far made a very unique achievement for the Aussie LNG sector: staying on budget.

With all of the development going on in Australia, cost overruns have an unavoidable fact for most LNG projects here. Chevron's Gorgon project, for example, was originally budgeted at $37 billion in 2009. Costs have now reached $54 billion--a 46% blowout.

So how have the Ichthys developers been able to stay on budget? Hong Kong analysts Bernstein Research have put forward an intriguing theory: they were late into the LNG game.

Bernstein points out that by waiting until several other Australian LNG projects were well advanced, Inpex and Total have been able to avoid "supply-chain inflation".

Here's how that works. When a big new play like LNG starts, key supplies and services are usually difficult to find. The local areas simply haven't developed the necessary support industries. So materials and parts have to be sourced from far afield, and service providers have to be trained up, or parachuted in. All at considerable cost.

But later in the game, things are much different. Local industries for LNG construction are well advanced. In fact, competing local suppliers and services firms have probably developed. Driving down prices in many areas of the construction process.

This suggests that being first isn't always best when it comes to building a new petroleum or mining district. It's also an argument for investment in junior explorers and developers. The kind of firms that get a big gain in valuation from the discovery of such a new play. But who then generally get bought out by larger firms--avoiding the financial pain of having to be an early builder during expensive supply-chain conditions.

Here's to timing,

Dave Forest