Cost blowout at Gorgon project
The chief executive of Chevron, John Watson, said that the high Australian dollar - worth about $US1.04 on Sunday, compared to about 86¢ when Gorgon was given the go-ahead in 2009 - contributed "about a third" of the cost increase.
Speaking to analysts on Saturday, Australian time, Mr Watson said the project also faced "fairly unique" logistics problems moving larger than expected amounts of construction materials to Barrow Island off Western Australia, where it is building a liquefied natural gas plant.
Last month Chevron revealed the expected cost of developing Gorgon, about 130 kilometres off the north-west coast, had risen from $37 billion to $52 billion.
The Gorgon cost blowout has led Chevron's partner in the project, Royal Dutch Shell, to signal it will reconsider further investment in the "overheated" Australian market.
Chevron owns 47.3 per cent of Gorgon. Shell and ExxonMobil each own 25 per cent, with the remainder held by two Japanese energy companies. Mr Watson said Gorgon "was over 55 per cent complete at year-end".
He said Chevron would apply lessons learned at Gorgon to another Australian gas project, Wheatstone, off the Pilbara.
"So, for example, we're working very hard right now on simple things like beds and roads and infrastructure, and that is going quite well at the moment," he said.
"At times we were impacted by weather as we were constructing the beds and other facilities and infrastructure in the early days of Gorgon. There were a number of cyclones that went through the area, and that impacted us."
He said Chevron's "legacy LNG projects in Australia" were among projects that would be supported by $36.7 billion in capital spending set to take place this year.
Mr Watson was speaking after announcing that Chevron's fourth-quarter profit had risen 41 per cent, to $US7.2 billion, compared with the same period in the previous year, driven partly by the sale of its share in the Browse project to Shell.
In a deal announced in August, Chevron swapped its interest in Browse, a gas project off the Kimberley led by Woodside, for Shell's interests in two other fields and $450 million cash.
The deal boosted Chevron's fourth-quarter earnings by $US1.4 billion, its chief financial officer, Patricia Yarrington, said.
Stacey Hudson, an analyst at Raymond James, estimates the exchange was worth 72¢ a share, which would put Chevron's adjusted earnings 8¢ below what analysts had expected but 40¢ higher than the fourth quarter of last year.
Chevron's results were also helped by the sale of the company's Caribbean fuels marketing operations.
Excluding the gain from the Australian asset sale, Chevron's net income rose 14 per cent in the quarter.
Chevron's production rose to 2.67 million barrels of oil and gas per day for the quarter, up slightly from a year ago but up substantially from the 2.5 million in the third quarter of last year.
Production has been hurt by the temporary closure of its Brazilian offshore project in the Frade field since oil was found to be seeping from the field in November 2011 and again in March last year.
Frequently Asked Questions about this Article…
Chevron says the Gorgon cost blowout was driven mainly by a stronger Australian dollar and extra logistics. The high Australian dollar (about US$1.04 at the time versus roughly 86¢ when Gorgon was approved) accounted for around a third of the increase, while unique logistics challenges moving larger-than-expected amounts of construction materials to Barrow Island also added significant cost.
The expected cost to develop Gorgon rose from $37 billion to $52 billion, producing a roughly US$15 billion (about $14.4 billion) increase that Chevron described as a major cost blowout.
Chevron owns 47.3% of Gorgon. Royal Dutch Shell and ExxonMobil each own 25%, and the remainder of the project stake is held by two Japanese energy companies.
Chevron said Gorgon was over 55% complete at year-end. The company plans to apply lessons learned from Gorgon — especially around logistics and simple infrastructure like beds and roads — to other Australian projects such as Wheatstone off the Pilbara.
For investors, the blowout has broader implications: Shell signalled it may reconsider further investment in what it called an "overheated" Australian market, while Chevron has said it will support legacy LNG projects with significant capital spending. The situation highlights project execution and currency risks that can affect partner returns and future investment decisions.
Chevron’s fourth-quarter profit rose 41% to US$7.2 billion, a result Chevron said was driven in part by the sale/swap of its Browse project interest to Shell. That deal (announced in August) swapped Chevron’s Browse interest for Shell’s interests in two other fields plus US$450 million in cash and boosted Chevron’s quarter by about US$1.4 billion, according to the company.
Chevron’s production rose to 2.67 million barrels of oil and gas per day for the quarter, up slightly from a year earlier and up from 2.5 million in the prior quarter. The results were also helped by the sale of the company’s Caribbean fuels marketing operations; excluding the gain from the Australian asset sale, Chevron’s net income rose 14% in the quarter.
Yes. Production was hurt by the temporary closure of Chevron’s Brazilian offshore Frade field after oil seepage was found in November 2011 and again in March of the following year, which required the field to be temporarily shut down.
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