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5 Years : From Aug 2011 to Aug 2016
--Gorgon project 40% over initial budget
--Cost overrun will squeeze profitability
--Australian currency, material costs up
By Ben Lefebvre
Chevron Corp. (CVX) said Wednesday it would spend $36.7 billion in capital projects in 2013, up 12% from 2012, an increase partially due to rising costs in a mammoth liquefied natural gas project in Australia.
The second-largest U.S. oil company after Exxon Mobil Corp. (XOM) said the Gorgon natural gas project in Western Australia will rise to A$52 billion (US$54 billion), up more than 40% from its latest estimate in U.S. dollar terms.
The increase emphasizes how the mining and energy boom in Australia has inflated prices for manpower and materials, threatening to stifle further projects. It will also add pressure to Chevron to target high prices for the natural gas eventually coming out its wells to pay for one of the largest LNG project-cost overruns in memory.
Fueling the surge has been the rise in the Australian dollar--up 49% since the Gorgon project began in 2009--and the competition for skilled labor in the country amid large-scale mining and energy projects by Woodside Petroleum (WPL.AU) and others.
Gorgon, now 55% completed, is slated to ship up to 15.6 million metric tons of LNG a year beginning in 2015 from three production units about 80 miles off the northwest coast of Western Australia.
Chevron also said it will spend big on oil and natural gas projects in Nigeria, Angola, the Republic of Congo, Kazakhstan and the deep water U.S. Gulf of Mexico. About $3.4 billion would be spent on scouring oil prospects offshore Sierra Leone and Suriname, and in the Kurdistan region of Iraq.
Chevron said its $29 billion Wheatstone project, also in Australia, is 7% complete and on budget. The project is set to start production in 2016 with an annual capacity of 8.9 million tons of natural gas a year.
An overrun for Gorgon was expected. Deutsche Bank analysts said in September they expected Gorgon's final cost to approach $50 billion.
Still, the steady climb in oil prices will save the project, said Fadel Gheit, senior energy analyst for Oppenheimer & Co. LNG prices are normally tied to the price of oil, which Chevron says have increased by 80% over the course of the project.
"This will squeeze the heck out of the profitability of the project," Mr. Gheit said of the budget increase. "If Brent oil prices drop below $80, this project would barely be competitive." Brent traded at $108 a barrel Wednesday.
About two-thirds of Gorgon's expected LNG supply has already been sold via contract to customers. But Chevron and other LNG suppliers are facing pressure from buyers to lower prices as the U.S. makes plans to start exporting its natural gas at prices much lower than the global average.
"Even if the US is not yet exporting LNG, it is already having an impact on suppliers around the world," said Leslie Palti-Guzman, global energy analyst at consultancy Eurasia Group. "It will definitely put downward pressure on pricing."
Chevron isn't the only company dealing with runaway costs in the region. Exxon said last month that costs for its LNG facility in neighboring Papau New Guinea had risen by 20% to $19 billion. Exxon and Royal Dutch Shell PLC (RDSA, RDSB), are partners in the Gorgon project.
Write to Ben Lefebvre at email@example.com
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