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Chevron's Gorgon hit by $15bn cost blowout

The LNG export project in Australia has faced high labour costs, poor productivity, logistical challenges, bad weather and a strong Australian dollar

Chevron is facing a $15 billion budget blowout at its Gorgon liquefied natural gas (LNG) export project in Australia, the company has said. But a string of recent gas discoveries bode well for future expansion of the plant, which would help boost the project’s profitability.

A combination of higher labour costs, poor productivity, logistical challenges, bad weather and the strong Australian dollar are all to blame for driving the project’s costs up by 40% from the initial estimate of $37bn in 2009 to $52bn. Foreign exchange movements alone accounted for one-third of the cost increase.

The announcement was expected. The US supermajor warned earlier this year that it would revise its budget upwards for the three-train 15.6 million tonne per year (t/y) facility in northwest Australia.

The cost rise, though, could have been worse, analysts said. The budget revision falls in the middle to low end of consensus expectations and drastically under the high mark of $60bn suggested by some media reports, noted Barclays.

Nevertheless, the project is only 55% complete and there is still potential for further cost escalation and production delays.  First LNG is now expected to be shipped to Asia in the first quarter of 2015, rather than late 2014 as originally planned.

But Chevron voiced confidence in the new budget and project economics. LNG from Gorgon will be sold on oil-linked contracts and while investment requirements have risen by around 40%, crude prices – which directly affect overall revenues – have jumped by around 80% since it signed off on Gorgon in 2009.  

Still, Australia is one of the most expensive places in the world to develop LNG plants. The industry is facing intense cost pressures with six separate LNG schemes – worth about $175bn – being built in parallel and competing for resources. BG Group and Santos both announced cost overruns at their LNG projects earlier this year.

Chevron, though, said that its $29bn 8.9m t/y two-train Wheatstone plant is on budget and schedule, but analysts remain skeptical as it is only 7% complete.

Industry executives have warned that if costs cannot be controlled and projects delivered on time, a second wave of proposed LNG developments worth A$150bn ($157bn) could be scrapped.

But the development of a string of greenfield LNG hubs dotted around the coast of Australia means subsequent brownfield projects should be more economically attractive.

Chevron hopes to counter rising costs by using recent gas discoveries off Western Australia to expand its projects, which should lower its marginal cost of production. LNG projects tend to see significant economies of scale advantages as additional capacity is added.

The discoveries have added at least 7 trillion cubic feet (cf) of gas to its Australian portfolio in addition to the volumes it already has for the three foundation LNG trains at Gorgon and the initial two trains at Wheatstone.

Chevron has said it has 50 trillion cf of gas resources in the Carnarvon basin off Western Australia, excluding its share of the North West Shelf LNG venture.

And the US supermajor believes that “significant potential remains in the Carnarvon basin” with undiscovered resources in the basin potentially amounting to about 127 trillion cf.

Citigroup analysts estimate that the cost overrun has cut rates of return on the foundation project to 12.2% based on $85 per barrel Brent crude price. However, a fourth train, costing $12.6bn, would see a return of 15.7% and seems virtually assured, noted the bank.

Chevron plans to progress to front-end engineering and design work for Gorgon's fourth train in 2013. A fourth train would increase export capacity to 20.8 million t/y and crown Gorgon as the biggest LNG project in Australia. The Woodside-led five-train North West Shelf venture is currently the largest with a capacity of 16.3m t/y. 

Chevron owns a 50% operating stake in the Gorgon joint venture, with partners ExxonMobil and Shell each holding a 25% interest. 

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