Gorgon Project Profitable Despite Cost Blowout

From Australian

By Matt Chambers

It is understood the updated estimate of the $43 billion project cost will be less than $60bn, with the blowout closer to $10bn than $20bn.

Speaking in New York yesterday, Chevron chairman and chief executive John Watson confirmed that the project’s costs had risen from the original Australian dollar estimate and said weather delays had also taken their toll.

“The project remains very economic,” Mr Watson said.

He said a rising Australian dollar, the impact of cyclones that had delayed work and a skilled labour shortage in Western Australia had all led to the cost blowout.

The news comes as BHP Billiton and Rio Tinto this week announced further cuts in capital spending and moves to slash their cost bases in an effort to protect profits.

It is believed Chevron, which owns 47 per cent of Gorgon and is its operator, will reveal its long-awaited cost and schedule review next week. With the Chevron board said to be meeting on Wednesday, an announcement is likely to come later in the week.

Whatever the cost increase is in Australian dollar terms, it will be magnified in US dollars.

A $12bn increase in the estimated cost of Gorgon to $55bn would make the headline number in US dollars about $US20bn higher than the $US37bn cost estimate provided by Chevron when the project started in 2009.

The currency conversion will not be so simple, though, with much of the capital spent when the Australian dollar was trading at a lower exchange rate.

Deutsche Bank analysts are expecting the project to cost $50bn.

Gorgon LNG production, set to begin in 2014, is also likely to be delayed.

The blowout follows a trend that has meant only one $2bn-plus resources project has come online in Australia this century without a cost blowout or delay.

That was the $3bn Darwin LNG project, which was built by ConocoPhillips and which started exporting in 2004.

Chevron Australia boss Roy Krzywosinski this week blasted the federal government’s carbon tax and other fiscal measures, saying confidence in major capital investments was being affected.

As well as Gorgon, Chevron is building the $29bn Wheatstone LNG plant on WA’s mainland.

Energy companies are building separate LNG plants in Australia, although it makes more sense to collaborate in some places.

For example, the Wheatstone field is near Woodside Petroleum’s Pluto field. Before both Chevron and Woodside embarked on separate mega-projects, the two fields were thought to be ideal candidates for joint development.

Woodside went first, developing Pluto as a stand-alone, one-production-train project.

With Chevron and Woodside unable to strike an acceptable deal to expand Pluto with Wheatstone gas, a new two-train project is being built for Wheatstone, while Woodside does not have enough gas to capture the economic advantages of building a second or third train at Pluto.

Santos boss and Australian Petroleum and Production Association president David Knox is one of the few executives to admit that the industry needs to take its share of the blame for the high costs plaguing the industry.

Royal Dutch Shell last month said it was investigating combining its onshore coal-seam gas reserves with those of one of three LNG plants being built at Gladstone, rather than pushing ahead with its own plant in a heated market.

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