Another $2b cost blowout for Gorgon
US energy major Chevron has raised the cost estimate for its huge Gorgon liquefied natural gas plant in Western Australia by a further $US2 billion ($2.2 billion), but worries remain in the market that a further increase beyond the revised $US54 billion is still possible.
The latest overrun makes the latest budget 46 per cent higher than the original for the project, Australia's largest single resources investment, which will also see a further delay in the production start-up to mid-2015.
The economics of Gorgon were still "attractive", vice-chairman George Kirkland said.
Last December, the group raised the cost estimate from $US37 billion to $US52 billion. The original start-up date was late next year, before being moved back to the first quarter of 2015 a year ago.
Construction of Gorgon, involving 15.6 million tonnes a year of LNG capacity in three trains, has been dogged by productivity and weather issues.
The problems have affected the arrival of critical equipment on the quarantine nature reserve of Barrow Island off the WA coast, and work on the island, where Chevron is operating under severe environmental and space constraints.
The project, in which ExxonMobil and Shell both have 25 per cent stakes, is almost 75 per cent complete. Exxon and Shell are believed to be assuming a final cost for Gorgon close to $US60 billion.
Productivity on Barrow Island and some small changes to the project scope are believed to be behind the latest adjustments.
One problematic area has been Leighton's contract to build the jetty, which it said had been impacted by scope changes and higher labour costs and productivity problems.
Mr Kirkland said lessons learnt from the complex construction were being applied to the $29 billion Wheatstone LNG project on the WA mainland, which remains on schedule and budget and is almost 25 per cent complete.
"These LNG developments are two of our most important future legacy assets, representing approximately 400,000 barrels a day of net production at full capacity," Mr Kirkland said.
"They will be substantial contributors to our cash flow for decades to come."
The partners' concerns about an inability to contain costs for the project have deterred them from moving ahead with detailed engineering on an expansion of Gorgon.
The site has enough space for one or two more LNG trains and a decision on starting engineering and design for a fourth train was originally targeted for last year.
Now, a year later, Exxon and Shell still want to see more progress on the foundation project before committing to design work on the expansion.
"This is another negative sign about the future prospects of LNG in Australia," said Tri-Zen International LNG consultant Tony Regan. "It helps to support the case that the other shareholders have been making that, 'no, we can't consider an additional train at this point'."
Gorgon is far from being the only LNG project in the region suffering from cost over-runs.
All three coal seam gas-based LNG projects under construction in Queensland have suffered blowouts, as well as ExxonMobil's $US19 billion LNG venture in Papua New Guinea, which was budgeted at $US15 billion.
Inpex's $US34 billion Ichthys LNG project in northern Australia is also seen as at risk of an increase.
Bernstein Research assumes a final cost of up to 30 per cent higher and the start-up of production in late fiscal 2017 instead of by the end of 2016.
Chevron also announced a drop in its 2014 capex budget.
Investment on capital projects and exploration next year was expected to be $US39.8 billion, about $US2 billion less than this year, it said.
About $US3.2 billion will be spent on exploration, including initial drilling at new acreage acquired in Australia, Kurdistan and Morocco.
InvestSMART FORUM: Come and meet the team
We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free