As construction starts on Australia's biggest ever resources development, the Gorgon liquefied natural gas project, and other large projects are approved for construction, there are signs that feared labor shortages and renewed labor union power are emerging, potentially pushing up development costs.

Senior industry participants and the central bank have warned for some weeks that Australia's rapid resources development could face the same problems of just two years ago when labor and equipment shortages forced companies to revise up project costs and extend timelines.

Now those warnings appear to be proving true with labor unions using the expected strong demand for skills to exercise their power.

More than half of the workers at Woodside Petroleum's Pluto LNG expansion went on strike this week, unhappy about accommodation arrangements at the site. Last month, the company also announced a US$1.1 billion cost blowout at Pluto, citing lower-than-expected productivity levels during construction.

On Friday, Maritime Union of Australia members went on strike at Total Marine Services, a shipping company servicing the offshore oil and gas sector, to press for higher wages and benefits. The 48-hour work stoppage follows a strike last month against Farstad Shipping ASA, a key contractor for Woodside, Chevron and Apache Corp. (APA) serving drill rigs and production platforms.

Unionized workers also plan a strike at Go Offshore, which is another of the 15 major vessel operators in Australia.

The ship workers are demanding a 30% pay rise over three years and pay parity with construction workers on offshore oil and gas projects, which the Australia Mines and Metals Association said could amount to an extra A$90,000 a year for each worker.

The labor problems for resource developers aren't a surprise with many senior industry participants having flagged their concerns.

"Just two short years ago there was a massive talent gap in the resources industry," Marius Kloppers, BHP's Chief Executive, said Nov. 18. "I believe this gap will return along with demand."

The government is trying to address the problem. It expects around 80 major job-generating projects to take shape until 2020, including the A$43 billion Gorgon development, and predicts a rise in demand for skilled labor, including electricians, welders and pipe fitters, of up to 70%.

In 2007 and early 2008, shortages of workers and key equipment--with delivery times for grinding mills for instance more than doubling to 45 months--caused cost overruns and delays at new projects, foremost BHP's ill-fated US$2.1 billion Ravensthorpe mine that had an original price tag of US$1.1 billion.

According to the RBA, mining investment has already risen to record levels as a share of gross domestic product, and could rise substantially in the next five years.

Much of this investment is concentrated in the oil and gas sector in Western Australia. The government's chief commodities forecaster, the Australian Bureau of Agricultural and Resource Economics, said last month the value of advanced resource projects--those that are either committed or under construction--jumped 41% to a record A$112.46 billion in the six months to the end of October.

Aside from LNG, major developments are also in the pipeline for the iron ore, uranium and gold sectors.

There aren't yet any official figures to confirm the increase in demand--the most recent figures are for the second quarter and show the country's resources sector employed 159,500 people, 6,700 fewer than the previous quarter. But the government estimates that an extra 70,000 skilled workers will be needed in the resources sector until 2020 to meet the demands of about 80 new projects, and a special taskforce met last month to decide how to tackle the problem.

One of the biggest problems for developers is that many projects are concentrated in vast, thinly populated Western Australia. In the state's Pilbara and Mid-West regions, workers on remote sites can earn up to 40% more than in a similar position in a city, even after the economic downturn.

Reg Howard-Smith, chief executive of the Western Australian Chamber of Minerals and Energy, expects "people shortages to be the top issue from 2010 and the following years."

In Western Australia about 50% of the industry operates on a fly-in-fly-out basis. To attract staff, companies have turned temporary camps into something more akin to villages complete with swimming pools, internet access, dieticians and physiotherapists.

"The sector needs to continue to boost livability," said Howard-Smith. It also needs to ferry workers from Australia's east coast out west, and encourage more women to join the resources workforce as their current participation is just 18%.

"But there's no doubt we need skilled immigration," if only to replace workers poached from other regions and trades within Australia, he said.

Most of Australia's iron ore comes from the Pilbara, where BHP, Rio Tinto Plc (RTP) and Fortescue Metals Group Ltd. (FMG.AU) are adding new mines as well as expanding railways and ports. Here, prices for rental properties have started rising.

"Rents have been going up about 10% per year, instead of 10% a month during the boom. But now we're going up at about 25% (on an annualized basis)," says Jan Ford of Jan Ford Real Estate in Port Hedland, a key port for iron ore exports. An average home now rents for A$2,000 a week, up from A$1,600 at the start of the year, Ford said.

Woodside Chief Executive Don Voelte last month said maintaining a core workforce with a low turnover would help the company "think up smarter ways to mitigate skills and material shortages."

Still, Woodside in August felt it was necessary to roll out an equity share plan for all employees to boost worker retention.

Copyright (c) 2009 Dow Jones & Company, Inc.