Chevron Lifts Cost Estimate for Australian LNG Project
October 30 2016 - 9:14PM
Dow Jones News
By Robb M. Stewart
MELBOURNE, Australia--Chevron Corp. (CVX) has flagged a US$5
billion cost blowout at the under-construction Wheatstone
gas-export facility, a further blow after the overrun and delays
seen at the energy company's other large gas project in Western
Australia.
The revision is to a budget almost five years old, made at a
time when local and international oil-and-gas producers were laying
down hefty bets on Asia's rising demand for imported natural gas.
Many of these projects stumbled over higher labor costs and a
strong Australian currency, but as they have begun producing have
positioned the country to leapfrog Qatar as the world's leading
exporter of liquefied natural gas.
On Friday, Chevron Vice President and Chief Financial Officer
Pat Yarrington told investors the total project cost for Wheatstone
had risen to about US$34 billion, 17% above the estimate given when
an investment decision was made in 2011 by the company and its
partners.
Work on the project during its first few years took place in a
"heated market," Ms. Yarrington said. Costs were further inflated
by a flagged delay in components being delivered to the project,
she added during a conference call following the release of
Chevron's third-quarter earnings.
"The contractor was unable to effectively manage the size and
the scale of the work scope that we had given," she said. "We
recognized that somewhat early on, and we did end up redirecting
some of the work to other yards. But even so, the modules were
late."
The project also underestimated the quantity of materials
required, she said.
The revised cost estimate was already factored into market
expectations, and may even be below some forecasts, said Ben
Wilson, an analyst at RBC Capital Markets in Sydney. He had
expected a gross cost of US$33 billion for the project.
Australia's Woodside Petroleum Ltd. (WPL.AU), which last year
bought Apache Corp.'s (APA) 13% stake in Wheatstone and other
assets, booked a US$865 million impairment in its 2015 earnings
against the project to reflect a slump in oil prices. On Monday,
Woodside said its exposure to the US$5 billion overrun was less
than 13%, and that its Julimar Brunello project that will supply
gas to Wheatstone's onshore plant was completed on time and under
budget.
Chevron said it continued to expect Wheatstone would produce its
first gas in mid-2017. All modules for the two production lines are
now on site and the installation of piping, electrical and other
components continued as planned.
The U.S. company already was hit with cost blowout at its larger
Gorgon project off Western Australia state, which is estimated to
cost US$54 billion against an original budget of A$37 billion.
Chevron in early April was forced to temporarily suspend production
at the plant on Barrow Island after encountering a problem with the
problem with the propane refrigerant circuit, part of a system used
to chill natural gas to a liquid so that it can then be
shipped.
Ms. Yarrington on Friday said both production lines at Gorgon
were now running and producing liquefied natural gas, and output
was expected to ramp up over the coming months. To date, 17 cargoes
had been shipped, and work was progressing on a third production
line that was due to begin output in the second quarter of 2017,
she said.
Located on the Pilbara coast of Western Australia, Wheatstone is
designed to produce 8.9 million metric tons a year of LNG, plus gas
for the domestic market. It has approval to expand to 25 million
tons annually. Most of the gas feeding the plant will come from the
Chevron-operated offshore Wheatstone and Iago fields, with 20% set
to come from the Julimar and Brunello fields.
Ms. Yarrington said about 85% of the planned output from the
five production lines across Gorgon and Wheatstone has been sold
under long-term contracts.
Write to Robb M. Stewart at robb.stewart@wsj.com
(END) Dow Jones Newswires
October 30, 2016 20:59 ET (00:59 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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