Chevron Lifts Cost Estimate for Australian LNG Project

   By Robb M. Stewart 
 

MELBOURNE, Australia--Chevron Corp. (CVX) has flagged a US$5 billion cost blowout at the under-construction Wheatstone gas-export facility, a further blow after the overrun and delays seen at the energy company's other large gas project in Western Australia.

The revision is to a budget almost five years old, made at a time when local and international oil-and-gas producers were laying down hefty bets on Asia's rising demand for imported natural gas. Many of these projects stumbled over higher labor costs and a strong Australian currency, but as they have begun producing have positioned the country to leapfrog Qatar as the world's leading exporter of liquefied natural gas.

On Friday, Chevron Vice President and Chief Financial Officer Pat Yarrington told investors the total project cost for Wheatstone had risen to about US$34 billion, 17% above the estimate given when an investment decision was made in 2011 by the company and its partners.

Work on the project during its first few years took place in a "heated market," Ms. Yarrington said. Costs were further inflated by a flagged delay in components being delivered to the project, she added during a conference call following the release of Chevron's third-quarter earnings.

"The contractor was unable to effectively manage the size and the scale of the work scope that we had given," she said. "We recognized that somewhat early on, and we did end up redirecting some of the work to other yards. But even so, the modules were late."

The project also underestimated the quantity of materials required, she said.

The revised cost estimate was already factored into market expectations, and may even be below some forecasts, said Ben Wilson, an analyst at RBC Capital Markets in Sydney. He had expected a gross cost of US$33 billion for the project.

Australia's Woodside Petroleum Ltd. (WPL.AU), which last year bought Apache Corp.'s (APA) 13% stake in Wheatstone and other assets, booked a US$865 million impairment in its 2015 earnings against the project to reflect a slump in oil prices. On Monday, Woodside said its exposure to the US$5 billion overrun was less than 13%, and that its Julimar Brunello project that will supply gas to Wheatstone's onshore plant was completed on time and under budget.

Chevron said it continued to expect Wheatstone would produce its first gas in mid-2017. All modules for the two production lines are now on site and the installation of piping, electrical and other components continued as planned.

The U.S. company already was hit with cost blowout at its larger Gorgon project off Western Australia state, which is estimated to cost US$54 billion against an original budget of A$37 billion. Chevron in early April was forced to temporarily suspend production at the plant on Barrow Island after encountering a problem with the problem with the propane refrigerant circuit, part of a system used to chill natural gas to a liquid so that it can then be shipped.

Ms. Yarrington on Friday said both production lines at Gorgon were now running and producing liquefied natural gas, and output was expected to ramp up over the coming months. To date, 17 cargoes had been shipped, and work was progressing on a third production line that was due to begin output in the second quarter of 2017, she said.

Located on the Pilbara coast of Western Australia, Wheatstone is designed to produce 8.9 million metric tons a year of LNG, plus gas for the domestic market. It has approval to expand to 25 million tons annually. Most of the gas feeding the plant will come from the Chevron-operated offshore Wheatstone and Iago fields, with 20% set to come from the Julimar and Brunello fields.

Ms. Yarrington said about 85% of the planned output from the five production lines across Gorgon and Wheatstone has been sold under long-term contracts.

Write to Robb M. Stewart at [e-mail]

(END) Dow Jones Newswires

October 30, 2016 20:59 ET (00:59 GMT)

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