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Perth, Australia (UPI) Nov 14, 2012
Chevron's massive Gorgon liquefied natural gas project in Australia faces a cost blowout.
A report Wednesday in Australia's Financial Review says the cost of the project could increase nearly $21 billion to more than $62 billion due to the high dollar, union demands, high costs of local manufacturing and productivity issues.
Partners for the project 81 miles off the northwest coast of Western Australia include Exxon Mobil (25 percent) and Royal Dutch Shell (25 percent). The reserves contain 40 trillion cubic feet of natural gas.
Brian Smith, Chevron's general manager for operations in Australia, speaking Tuesday to the Australian Resources Conference in Perth said the company didn't want to speculate on the extent of any cost increase for Gorgon.
"The cost is still the same number at this point in time. It may well be in the future or it might be some other number," Smith said.
"I think it's no surprise that the exchange rate has gone up and is higher than when the project was approved. (But) we're not going to speculate on what that number is," Smith said.
The report of a cost blowout for Gorgon follows an announcement Monday by Exxon Mobil, Oil Search and Santos that the budget for a new natural gas export facility in Papua New Guinea had increased 21 percent from previous estimates to $19 billion.
Speaking on the sidelines of the conference in Perth, Federal Resources Minister Martin Ferguson said resources companies, including Chevron, were adjusting to a changing environment regarding cost assessments.
He said project managers in Australia were under pressure from their head offices overseas to get costs under control.
"I think there are cost pressures on a range of projects at the moment and companies are going to have to attend to working out now how to make sure they meet their timelines and do the best they can to deliver on budget as close as they can," Ferguson said.
"Obviously projects from time to time go through cost assessments," the minister said, citing BG Group's announcement in May that its gas project in Queensland would be 36 percent higher at $20.4 billion.
More budget blowouts are expected at Australian LNG projects, a Bernstein Research analyst said in a note Tuesday, Platts news service reports.
"Further upward cost revisions seem highly likely on all those projects following this announcement," said the analyst, Neil Beveridge, referring to the Papua New Guinea cost blowout.
"Cost blow-outs and project delays are endemic to all Australian oil, gas and mining projects," Beveridge said. "With a shortage of skilled labor and high infrastructure costs for greenfield developments, project capex overruns are the rule rather than the exception in the LNG industry."
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