UPDATE: Unconventional LNG Project Reveals $2.5 Billion Cost Blowout

   By Ross Kelly 
 

SYDNEY--Santos Ltd. (STO.AU) has increased the cost of its Australian gas-export joint venture by US$2.5 billion, highlighting the challenges facing companies attempting to prepare unconventional gas for export.

News of the cost blowout to US$18.5 billion comes as producers utilize new drilling technology to tap onshore gas trapped in shale rocks or coal seams. Four projects in Queensland state plan to build massive gas-export terminals at the port of Gladstone fed with coal seam gas, an unconventional fuel trapped in coal seams buried hundreds of meters below the Earth's surface.

The gas will be piped to the coast and chilled for export to Asian utilities at liquefied natural gas, or LNG, processing plants. Companies in the U.S. are also exploring the potential to chill some of the country's vast shale gas reserves for export amid a slump in domestic U.S. gas prices.

Coal seam gas, or CSG, has never been prepared for export before on a large scale and Santos and joint venture partners Total SA (TOT), Petronas and Korea Gas Corp. (036460.SE) have various technical and logistical challenges to overcome before shipping their first cargo in 2015.

A rival CSG project in Queensland operated by BG Group PLC (BG.LN) this year reported a much larger US$5.4 billion cost blowout to US$20.4 billion. It pinned much of the increase on the strength of the Australian dollar, which hurts offshore companies like the British group more than local players such as Santos.

Big resources projects in Australia also face labor shortages, which can push up employment costs and cause delays.

Although Santos's project isn't immune from these challenges, the budget increase at Gladstone wasn't about significant overruns or changes to work requirements, Santos Chief Executive David Knox said.

"The key challenge facing the CSG-to-LNG projects is upstream field deliverability in the early stages of project ramp-up," Knox said in a statement.

Conventional LNG projects are typically supported by just a few offshore natural gas wells, whereas thousands of onshore wells are required to support the Santos joint venture and the three others CSG-to-LNG projects planned for Gladstone.

Santos said it has been forced to bring forward US$2.5 billion of spending that was originally expected to be incurred after first LNG in 2015 in order to get its gas wells up to speed.

The two other ventures planning to build LNG projects fed with coal CSG at Gladstone include one between ConocoPhillips (COP), Origin Energy Ltd. (ORG.AU) and China Petrochemical Corp., known as Sinopec.

The fourth venture, between Royal Dutch Shell PLC (RDSB) and PetroChina Co. (PTR) is the only one that hasn't yet made a final investment decision.

The increase at the Santos venture shouldn't come as a big surprise. Deutsche Bank for example was assuming spending at Santos' project and the rival Origin and Conoco venture 15% higher than original guidance. Still, Santos shares slid 3.8% in early trade in Sydney, underperforming a 0.6% rise in the wider market.

-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; [e-mail]