UPDATE: Shell Warns On Australian Cost Pressures

--Shell Australia CEO says cost pressures "worrisome"

--Company still to decide on about US$20 Bln of investment

--Says processing Queensland gas through rival project an option

(Updates to clarify Shell exec comments on spending plans in second paragraph.)

By Ross Kelly

SYDNEY--A senior Royal Dutch Shell PLC (RDSB) executive said Wednesday the cost of building energy projects in Australia is becoming "very worrisome" as the European oil giant prepares to decide whether it will spend billions more dollars in the resource-rich nation.

Shell has already committed almost US$30 billion to Australian gas-export projects being built over the next five years. The company's Australian head, Ann Pickard, said the figure is poised to become US$50 billion if final decisions are made on other projects that Shell has on the drawing board.

"So the costs have to stay competitive," Ms. Pickard told a conference.

Australia is central to the growth plans of many big oil companies including Shell and Chevron Corp. (CVX) as they attempt to meet intensifying demand for cleaner-burning fuels from fuel-strapped Asian nations such as Japan and rapidly industrializing countries such as China. Natural gas has overtaken oil to count for 51% of Shell's total fossil fuel output.

Australia's vast natural gas reserves, political stability and proximity to Asia make it an attractive place to invest. Over US$175 billion worth of gas-export projects under construction on its coastline stand to catapult the country above Qatar as the world's biggest liquefied natural gas, or LNG, exporter by the end of the decade. LNG is natural gas chilled to liquid and exported by sea.

The industry here though faces challenges. A lack of skilled labor combined with a surge in development activity that's also occurring in the country's booming mining sector has squeezed labor supplies and made Australia one of the most expensive places in the world to produce LNG. And a soaring Australian dollar is making locally-based skills and equipment more expensive for foreign-based companies.

Such cost pressures are building at a time when companies mull whether to start exporting LNG to Asia from North America and East Africa, potentially increasing competition for Australian projects, particularly those not currently under construction.

Shell hasn't yet made a final decision on whether to proceed with a massive LNG venture in Queensland state with PetroChina Co. (PTR) that will attempt to chill gas trapped in coal seams for export. And although Shell's just increased its shareholding in the Browse LNG development in Western Australia state, an investment decision on that project isn't expected until next year.

"I'm hoping we can get some more projects going but the costs here are getting to be very worrisome," Ms. Pickard told reporters.

Shell is hoping it can source workers more easily and more cheaply by timing a final investment decision on its Queensland LNG joint venture a few years after three rival developments there. Still, Ms. Pickard said it's possible Shell could process its gas through a rival LNG plant in Queensland rather than build its own plant.

"That's certainly an option. But the intent of PetroChina and Shell, of course, it to continue with our own project," she said.

As for Browse, joint venture partners including Woodside Petroleum Ltd. (WPL.AU) are spending over US$1 billion investigating the commercial viability of piping the gas to a new LNG plant in the environmentally-sensitive Kimberley region. Shell's decision this week to almost triple its stake in the project by taking Chevron's 17.5% interest has fanned speculating the resource could be processed on a floating LNG, or FLNG, vessel instead. A pioneer of FLNG technology, Shell is targeting first production from the world's first FLNG vessel from its Prelude field, located near Browse, in 2016.

"We'll take the cost estimates and see if we've got a commercial project in the Kimberley or not. Then, obviously in consultation with the government, we'll make a decision on whether we'll go forward in the Kimberley or look at other alternatives."

-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; [e-mail]