PNG LNG capex increase fuels Gorgon cost fears
The ExxonMobil-operated PNG LNG venture in Papua New Guinea on Monday increased the project's capital expenditure budget for the second time in under a year, fuelling fears of further Australasian LNG budget blowouts.
ExxonMobil subsidiary Esso Highlands raised its capital cost estimate by 21% to $19bn, citing the strengthening of the Australian dollar, work stoppages and land access issues stemming from disputes with landowners and torrential rain as the reason for the cost hike.
The Australian-listed project partners Oil Search and Santos said the appreciation of the Australian dollar against the US dollar accounted for $1.4bn of the rise, with delays from work stoppages and land access issues adding $1.2bn to the cost estimate. A further $700m increase was attributed to adverse logistics and weather conditions.
The PNG LNG consortium announced a $700m capital cost hike in December 2011, which again was largely attributed to a weakening of the project's financing package, including a $14bn US dollar-denominated debt financing facility to pay a largely Australian workforce at PNG LNG (see GLM 2 December 2011).
That cost hike was funded in line with the project's financing ratio, comprising 70% debt and 30% equity and the ExxonMobil subsidiary said the latest budget increase would again be funded under the existing financing structures.
The cost overrun was partly cushioned by an increase in the planned capacity of the project to 6.9m tonnes per annum (mtpa) from 6.6mtpa, through plant optimisation and some minor modifications.
Oil Search managing director Peter Botton said in a statement that there had been no decision on how the additional 300,000 tonnes per annum of LNG capacity would be marketed, but added that it would be sold either under contract or on the spot market.
Adelaide-headquartered Santos said the project is now 70% complete, while ExxonMobil reaffirmed that the project was on target for first LNG in 2014. However, the latest cost rise and the issues that the project partners have faced accessing the PNG LNG site has raised questions about whether it will be able to meet that target.
"The announcement of an increase in the capex of PNG LNG was not a surprise, but the magnitude of the increase was... While the start-date of 2014 has been maintained, higher costs must reflect some slippage and we now expect start-up towards the latter half of 2014," Hong Kong-based Bernstein Research analyst Neil Beveridge said in a research note.
Gorgon cost review in December
While their exposure to the stronger Australian dollar has seen the PNG LNG venture hit by some of the same cost pressures as the liquefaction projects under construction in Western Australia and in Queensland, PNG LNG, sanctioned in December 2009, still appear to remain competitive.
The latest cost increase brings the capital expenditure estimate to around $2,750/tonne per annum (tpa) of capacity, compared with those achieved by both Woodside at Pluto ($3,700/tpa) or the $34bn 8.4mtpa Ichthys project in Darwin, northern Australia, which came in at a hefty $4,060/tpa (although Ichthys was only commercially viable because of its ability to produce around 100,000 barrels/day of condensate and 1.6mtpa of liquefied petroleum gas).
With PNG LNG becoming the latest in a line of cost blowouts, attention has turned to the 15.6mtpa Gorgon project in Western Australia where there is mounting speculation that operator Chevron will be forced to announce a significant cost increase to the existing Australian dollar 43bn ($45bn) cost estimate.
The California-headquartered oil and gas major launched a detailed cost review at Gorgon in August, when George Kirkland, head of Chevron's global upstream and gas division, admitted that a 20% appreciation in the Australian dollar against the US dollar since the project was sanctioned in September 2009, and labour productivity issues could result in an increase in the cost estimate.
A company spokeswoman confirmed this week that the review would be released early next month.
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