--Cost of PNG facility rises to US$19 billion
--Exxon blames foreign exchange rates, land disputes,
weather
--Exxon expands project's capacity
--Says capacity expansion, higher LNG prices offset cost
increase
(Adds analyst comment in fourth paragraph)
By Ross Kelly
SYDNEY--Exxon Mobil Corp. (XOM) said the cost of building a
natural-gas export facility in Papua New Guinea had blown out to
US$19 billion, as the project was impacted by exchange-rate
movements, local landowner disputes and torrential rain.
The cost of the project would be US$3.3 billion higher than the
last estimate, the world's biggest listed oil company by market
value said in a statement Monday. The facility was 70% completed
and on track to ship the first cargos to China, Japan and Taiwan in
2014, it added.
Exxon said that the cost overrun would be offset by higher
output capacity of 6.9 million metric tons per annum, up from 6.6
million tons, along with a 30% jump in liquefied-natural-gas, or
LNG, prices since construction began in 2009.
"Despite the cost increase, it's still the most profitable
project under construction in the region," said Matthew Howell, an
analyst at energy-industry consultancy Wood Mackenzie. "We don't
see the increase affecting its commercial viability."
Even so, the ballooning budget highlights the mounting cost
pressures faced by global oil companies including Chevron Corp.
(CVX) and Royal Dutch Shell PLC (RDSB.LN) as they seek to tap
rising Asian demand for cleaner-burning fuels by building export
terminals in places like Australia and Papua New Guinea that chill
natural gas into liquid before exporting it in tankers.
Earlier this year, Chevron said it was reviewing costs at the 43
billion Australian dollar (US$44.7 billion) Gorgon liquefied
natural gas, or LNG, project in Western Australia state after a 20%
gain in the Australian dollar since construction started in 2009.
Exxon and Shell are also large investors in Gorgon.
Chevron Chief Executive John Watson said in a recent interview
that the company had decided not to hedge foreign-currency risks as
Australia's economy was heavily reliant on the resources sector,
which meant energy prices were likely to rise in step with the
Australian dollar and boost revenue from Gorgon.
The cost blowout at the so-called PNG LNG project is the second
increase--only last year, the company raised the cost estimate to
US$15.7 billion from an initial US$15 billion.
The increases underscore the unique challenges faced by
companies doing business in Papua New Guinea, an impoverished
Pacific nation better known for its jungles and lawlessness.
Exxon operates and owns 33.2% of PNG LNG, while Australia's Oil
Search Ltd. (OSH.AU) and Santos Ltd. (STO.AU) own 29% and 13.5%,
respectively. The balance is mostly spilt between the local
government and dozens of landowning tribes that frequently stage
protests--and even carry out violent attacks--against what they see
as an unfair distribution of benefits from the project.
The country also presents logistical challenges, including
transporting gas from the country's highlands to the coast via a
190-mile pipeline that traverses rugged terrain up to 650 feet
above sea level. From the shore, it has to be transported by a
250-mile subsea pipeline to a gas-processing terminal.
Foreign-exchange accounted for US$1.4 billion of the latest cost
increase, according to Oil Search. Work stoppages and land-access
disputes, meanwhile, added US$1.2 billion to the overall increase,
Oil Search said.
Another US$700 million was pinned on adverse logistics and
weather conditions, including rainfall that Exxon said exceeded
historic norms for most of the last two years.
Both Oil Search and Santos said they had ample liquidity to
cover the higher project funding requirements. By the close of
trade Monday in Sydney their shares had fallen 3.4% and 2.2%,
respectively.
Write to Ross Kelly at ross.kelly@wsj.com
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