--Cost of PNG LNG rises to US$19.0 billion from US$15.7
billion
--Exxon pins rise on foreign exchange, land access, bad
weather
--Exxon expands LNG project's capacity to 6.9 million
tons/year
--Says capacity expansion, higher LNG prices offset cost
increase
(Adds reasons for cost increase; project background
throughout.)
By Ross Kelly
SYDNEY--Exxon Mobil Corp. (XOM) said Monday the cost of building
a massive natural gas-export project in Papua New Guinea has blown
out to US$19 billion from a previous estimate of US$15.7 billion
due to foreign exchange fluctuations, landowner disputes and
torrential rain.
Exxon said the project is 70% complete and remains on track to
ship its first cargos to buyers in China, Japan and Taiwan in 2014.
An increase in the plant's output capacity announced Monday to 6.9
million metric tons per annum from 6.6 million tons would improve
its financial returns, the company expects.
"Despite the cost increase, project economics are helped by the
5% increase in plant capacity and approximately 30% increase in
commodity pricing since project funding in 2009," Exxon said in a
statement.
Even so, the large budget overrun highlights the mounting cost
pressures faced by international oil majors such as Exxon, Chevron
Corp. (CVX) and Royal Dutch Shell PLC (RDSB.LN) as they attempt to
tap rising Asian demand for cleaner-burning fuels by building
complex and expensive export terminals in Australia and Papua New
Guinea that chill natural gas to liquid for export by tanker.
Chevron said in July that it was reviewing the cost of the 43
billion Australian dollar (US$44.7 billion) Gorgon liquefied
natural gas, or LNG, project in Western Australia state following a
20% rise in the Australian dollar since construction began in 2009.
Logistical challenges and the strong local currency also prompted
two Australian projects involving Total SA and BG Group to announce
large budget overruns earlier this year.
Chevron Chief Executive John Watson in August. Mr. Watson said
in an interview that the company opted not to hedge
foreign-currency risks as Australia's economy is heavily reliant on
the resources sector, so energy prices would rise in step with the
Australian dollar, boosting likely revenues from Gorgon.
Exxon's cost blowout at the so-called PNG LNG project follows an
increase last year from an initial US$15 billion estimate and also
highlights the unique challenges faced by companies doing business
in Papua New Guinea, an impoverished Pacific nation better known
for its jungles and lawlessness.
In a technically complex undertaking, the project involves
transporting natural gas from the country's lush highlands to the
coast via a 190-mile, 32-inch pipeline traversing rugged terrain up
to 650 feet above sea level. From the shore, it will then be
transported by a 250-mile subsea pipeline to a gas-processing
terminal to be chilled into LNG for export.
Exxon operates and owns 33.2% of PNG LNG, while Australian
companies Oil Search Ltd. (OSH.AU) and Santos Ltd. (STO.AU) own 29%
and 13.5% stakes, respectively.
Foreign exchange fluctuations accounted for US$1.4 billion of
the cost increase, while delays from work stoppages and land access
issues added a further US$1.2 billion, Oil Search said.
Another US$700 million was pinned on adverse logistics and
weather conditions including heavy rainfall.
Exxon confirmed that foreign exchange was the largest single
contributor, adding to costs associated with work stoppages caused
by community disruptions and problems accessing land.
"Extraordinary logistics and weather challenges also increased
costs. In particular, rainfall exceeded historic norms for most of
the last two years," Exxon said.
In separate announcements to the Australian Securities Exchange,
Oil Search and Santos said they had "ample liquidity" to cover
their higher project funding requirements. By 2343 GMT, shares in
the companies had fallen 5% and 2.2%, respectively.
Write to Ross Kelly at ross.kelly@wsj.com
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