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Rising costs fail to hold back Asia-Pacific LNG export projects

WOODSIDE's Pluto LNG project has become the latest to suffer cost escalations, but the outlook for the sector remains robust. The Papua New Guinea (PNG) LNG project has received approval from ExxonMobil and its partners and Chevron has secured a lucrative sales deal with Japan for its potential Wheatstone LNG venture.

Woodside said in November that the cost of building Pluto could end up being 6-10% higher than the A$11.2bn ($10.2bn) approved by the company and its partners in 2007. Costs have escalated in part because of competition with a series of other Australian LNG projects is driving up the price of labour and services. However, the 4.3m tonnes a year (t/y) first phase is already more than 80% complete and is still on target to start producing LNG in 2011, says Woodside, despite a brief strike over workers' accommodation arrangements in late November.

"Three projects have now come out with higher than expected costs – Gorgon, Pluto and PNG – but these problems do not appear to be affecting the projects. They may be being offset by higher oil-price expectations," says Graeme Bethune, chief executive of Energy Quest, an Australia-based consultancy.

In October, one of the partners in PNG LNG, Australia's Oil Search, said costs had risen to $15bn from an original forecast of $12.5bn. But that project is also moving ahead. In December, ExxonMobil and its partners – Oil Search, fellow Australian firm Santos, Nippon Oil and various local PNG interests – approved the project, pending finalisation of sales and purchase agreements, and financing arrangements.

The decision followed news that ExxonMobil had agreed an LNG sales contract for the PNG project with Japan's Tokyo Electric Power (Tepco), Japan's largest utility, for 1.8m t/y for 20 years. A second 20-year deal was signed with China's state-owned Sinopec, which is taking 2m t/y. Sinopec is to build an LNG-import terminal in Qingdao, Shandong province, to handle the imports.

With two other sales agreements – with Taiwan's CPC and Japan's Osaka Gas, expected to be finalised by early 2010, according to Oil Search – all of the project's 6.6m t/y capacity looks set to be contracted. Work on the project is expected to start in 2010, with the partners aiming to bring the plant into production in late 2013 or early 2014.

These deals were somewhat overshadowed by Chevron's December agreement with Tepco, worth around $80bn, under which the Japanese firm would take nearly half of the output from the planned Wheatstone LNG project. Tepco will buy 3.1m t/y for over 20 years, and has also taken 15% equity stake in the project, which could give it access to another 1m t/y. Analysts say the deal moves the project much closer to realisation and puts it in a strong position in relation to various other putative Australian LNG projects (see Table 1). Chevron has said it expects to make a final investment decision (FID) on Wheatstone in 2011.

Meanwhile, the partners working on the Woodside-led Browse LNG project, another for which a FID is expected in 2011, have been told by the government in Western Australia to hurry up their decision-making. The state government told the partners in early December they had 120 days to decide where they would site their facility and that they must build it at the government's preferred location in the Kimberley region unless they could demonstrate an alternative location would be commercially viable at an earlier time.

While Woodside has been eager to push on in Kimberley, some of its partners – Chevron, BHP Billiton, BP and Shell – are believed to favour building a pipeline to the North West Shelf LNG project at Karratha when that runs out of local gas. But that would not be until long after the government had hoped to get Browse up and running. A further complication has since arisen, when it emerged that the state government wants to build the plant in a different location to that favoured by Woodside.

"You would expect the deadline to crystallise things one way or the other, although the government hasn't spelt out precisely what would happen if the deadline isn't met," Bethune says.

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