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Chevron Upgrades Gorgon LNG Project Cost Estimate

Date : 12/06/2012 @ 4:50AM
Source : Dow Jones News

Chevron Upgrades Gorgon LNG Project Cost Estimate

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-- Chevron ups Gorgon cost estimate from initial A$43 billion

-- Cites labor shortages, currency swings and bad weather for budget overrun

-- Plant on track to start up in late 2014, first cargo due soon after

-- Chevron says Wheatstone remains on budget, schedule

SYDNEY--Chevron Corp. (CVX) raised the cost of building the Gorgon gas-export project in Australia by 21% to 52 billion Australian dollars (US$54.4 billion), citing a strong local currency, labor shortages and bad weather.

The increase from an initial estimate of A$43 billion comes just weeks after ExxonMobil Corp. (XOM) announced a 20% increase at a rival multibillion dollar facility in Papua New Guinea, and highlights the mounting cost pressures facing international oil companies as they develop Australia's vast natural gas reserves for export to energy-hungry Asia.

A more than 20% jump in the value of Australian dollar since Gorgon was approved in 2009 has made it more expensive for Chevron and others to pay for locally sourced equipment, services and labor. The currency's value been driven higher by ongoing demand for the country's raw commodities, including iron ore and coal from fast-growing Asian economies.

Analysts don't expect the value of the Australian dollar to drop below parity with the greenback any time soon, citing the country's high interest rates compared to other developed nations and the increasing popularity of its sovereign bond market.

Large mining projects are competing with Gorgon and another six LNG developments under construction in Australia to attract skilled workers, often to remote locations with unpleasant weather conditions and few social amenities.

With a population of around 23 million people, less than ten times smaller than the U.S., Australia lacks a deep labor pool to supply mega-projects and bulging pay packets are often required to entice workers out west or up north. Australia has also launched a controversial program to offer special visas to workers from overseas to help fill a skills shortage.

Chevron said Wednesday that Gorgon's economics remain attractive following an 80% increase in oil prices since construction began. It added the plant is due to start up in late 2014, with the first LNG cargo expected to be shipped in the first quarter of 2015.

Gorgon, which will have an annual production capacity of 15.6 million metric tons of LNG and will ship to customers in Japan and China, is the first of two LNG developments being undertaken in Australia by Chevron. Construction on the US$29 billion Wheatstone development began last year and Chevron said it is currently 7% complete and is on budget and on schedule.

"Our exploration program continues to discover additional gas resources that could support future expansions of our Australian LNG developments," Chevron Vice Chairman George Kirkland said in a statement.

Write to Ross Kelly at ross.kelly@wsj.com

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