BG Group hit by $5bn QCLNG cost blowout

UK-headquartered BG Group has raised the capital cost estimate in its Queensland Curtis LNG (QCLNG) project in Australia to $20.4bn from an original estimated cost of $15bn when sanctioned in November 2010, the company acknowledged on Thursday.

The company attributed the 36% cost hike to the appreciation of the Australian dollar by around 20% since the 8.5m tonne per annum (mtpa) project was sanctioned, and a related jump in labour and raw materials costs in the local economy.

“About half of the capital expenditure increase that we announced is associated with the Australian dollar/US dollar foreign exchange,” BG CEO Frank Chapman said in the company’s first-quarter results briefing.

“Of the remainder, there is a 19% increase in underlying costs as a consequence of the inflationary effects and the rising costs of local goods and services, costs of compliance with regulatory processes and some scope change.”

The higher budget comes in the wake of similar cost overruns at rival LNG developments in Australia and Papua New Guinea, but Chapman claimed that its first-mover advantage in Queensland’s coal-seam-gas-to-LNG sector, where two other projects have since taken a final investment decision, had shielded the UK producer from further cost increases.

“In terms of that 19% underlying cost, it would be fair to split that by two-thirds upstream and one-third downstream,” Chapman said. “That one-third downstream cost split would have been more, and that is the benefit of being the first mover and putting strategies in place that locked the labour rates.

“It was not possible to tie-down the upstream costs in the same way as we managed to mitigate to market effects in the midstream and LNG plant areas.”

BG holds a 93.75% stake across the two-train development, with Chinese state oil and gas producer CNOOC holding 10% in the first train and Japan’s Tokyo Gas having a 2.5% interest in the second train. However, the rising costs of the project coupled with the UK producer’s need to free up capital to invest in new liquefaction capacity has raised speculation that the company will offer an equity stake in QCLNG, although Chapman refused to be drawn on whether it was courting potential investors in the project.

QCLNG expansion on backburner

BG said that the cost overrun would not impact the timetable for QCLNG’s first two-trains, with first LNG still expected in 2014, but Chapman indicated that the company’s decision last year to purchase LNG from the Sabine Pass project in the US Gulf may see it opt to slow development of a planned third expansion train at QCLNG.

“With Sabine Pass, we will hit our 20mtpa growth target in 2015, and we will see the full benefit of Sabine coming in 2016-2017 when we will be sitting on a portfolio of around 26mtpa. So the pressure to do something with QCLNG train three is not there,” said Chapman.

BG had planned to make a decision on the QCLNG expansion in 2012. Chapman said the company is balancing the potential benefits of pushing ahead with project sanction that would allow it to start construction without demobilising the workforce in place on the first two trains with the need to take its time to understand the upstream resources in the Bowen Basin in order to get the development in the right order.

BG in US diversion push

The cost overrun overshadowed a 55% increase year on year in profits to $1.27bn for the first quarter of the year, driven by the company’s success in diverting flexible LNG cargoes to higher priced markets in Asia and South America.

BG’s LNG operating profit for the quarter rose by 42% year on year to $812m, while total managed volumes grew by 3.19% year on year to 320,300 tonnes. The company delivered five cargoes to the US and just two to Europe during the quarter, with 12 to South America and 34 to Asia.

Chapman said that BG had been gradually reducing the number of cargoes it has brought into North America – it delivered eight in the first quarter of 2011 and seven in the previous quarter – and was working with stranded end-users to connect them to the US network thereby freeing more cargoes that can be diverted.