Unmasking the Gorgon cost monster

Chevron's decision to delegate a third party to negotiate key parts of its Gorgon LNG labour agreement, and its commitment to using the expensive Barrow Island, have meshed to create a cost monster.

Readers have helped me piece together further details as to why the Gorgon cost structure went so horribly wrong (Chevron hikes Gorgon cost estimate, December 6 and And miners fess up on IR links, December 5).

About one-third of the rise came from the rising Australian dollar. At the core of the remainder was the Chevron decision to use a local chamber of commerce to undertake an extremely complex labour arrangement rather than direct negotiations, and giving contractors flexibility to innovate in labour arrangements.

But the effects of this mistake were to be compounded by the fact that Chevron took high cost options, albeit options that usually made longer term sense on their own.

For example, there were extensive Gorgon facilities on Barrow Island which is an environmental flora and fauna reserve. Consequently, everything – absolutely everything – has to be fumigated before going to Barrow Island to prevent the introduction of flora or fauna pests. For example, large bulldozers have to be wrapped completely in air-tight plastic and then fumigated. Every bit of rubbish, down to the last Coke can, has to be collected and returned to the mainland.

To reach the island, everything has to go by sea (or air), thus involving maritime workers, one of the groups Chevron are complaining about. But everyone knows the maritime unions are tough to deal with and you need to deeply involve the chief executive in the negotiations rather than rely on the local chamber of commerce.

In the North West Shelf Project, for example, much more went by road to the site.

And Barrow Island is not a good site for an LNG plant – Chevron have to build a jetty/trestle of 5.2km length (the longest of any LNG plant anywhere in the world) to get out to deep water, and they still have to dredge to get the LNG tankers to the berth. Long jetties/trestles and dredging add tremendously to the costs.

Chevron have been working on Barrow for decades, so they knew what was required and the advantages of using Barrow Island.

My readers tell me that Chevron are using different instrumentation systems on the Gorgon and Wheatstone plants, so instrument engineers/technicians have to be trained on different systems and there is limited sharing of spare parts.

Again, longer term this will make sense but given the lethal cocktail of union action, federal government decisions and remote top management then costs are going to go through the roof.