AUSTRALIAN LNG INFLATION
According to FT, the total value of capital expenditure overruns in Australia's liquefied natural gas industry over the past decade has risen to almost $50bn, after Chevron admitted a $5bn cost blowout at its Wheatstone LNG facility.
The latest overruns come on top of a fall in LNG prices, meaning that the profitability of Australia's LNG industry is being squeezed at a time when it is poised to overtake Qatar as the world's largest exporter.
"The rampant cost inflation on Australian projects combined with the collapse in oil prices is damaging for a lot of these projects," said Neil Beveridge, analyst at Bernstein. LNG prices have been affected by a supply glut and are also linked to oil prices in Asia.
"You need a triple-digit oil price to justify the economics of these projects and deliver a return on capital to shareholders," he added.
The oil and gas industry has embarked on a A$200bn (US$152bn) LNG construction boom in Australia in a bid to capitalise on energy demand in the fast-growing Asian region. But in March, Woodside Petroleum shelved its $40bn Browse project, which included BP and Royal Dutch Shell as partners. Last year Shell cancelled plans for the $20bn Arrow LNG project in Queensland.
Chevron disclosed the latest cost overrun at its Wheatstone project in Western Australia on Friday. Pat Yarrington, Chevron's chief financial officer, told analysts the total cost of the project was now forecast at $34bn, up $5bn from its initial plans.
"That original appropriation request was taken in 2011 and, as you can all appreciate, during the first few years of construction there was a much more heated market," she said.
Ms Yarrington blamed the cost overrun on the late delivery of gas liquefaction modules, which cool gas to low temperatures to turn it into liquid that can be transported more easily. She said Chevron had also underestimated the quantity of materials needed to complete the project.
"I would say the second element was something we had seen on Gorgon as well and it is one of the primary areas where we are trying to improve our project execution," said Ms Yarrington.
Chevron's Gorgon, which is located close to Wheatstone, began shipping LNG cargoes this year. The complex project, which is based in a remote and harsh environment, cost $54bn to complete — about $20bn more than its initial budget.
Inpex, ConocoPhillips and ExxonMobil are among other companies to have admitted overruns in recent years.
Dale Koenders, analyst at Citi, said each Australia LNG project cost overrun has been due to project-specific issues, but generally reflect insufficient planning.
"There is also a growing level of complexity involved in LNG projects, which means that any delay, be it because of flare design at Pluto or labour productivity issues for Wheatstone module fabrication, can have bigger flow on impacts to project budget and schedule," he said.
LNG spot prices in Asia have fallen to $6.60 per million British thermal units, down from a peak of about $20 MMBTU in 2012-13, says Bernstein, which predicts the LNG supply glut will not ease until the early 2020s.
Chevron initially plans to build two LNG trains with a combined capacity of 8.9m tonnes a year at its Wheatstone project. Its main partners are Woodside (13 per cent) and the Kuwait Foreign Petroleum Exploration Company (13.4 per cent).
Chevron and other operators say a profitable return on their LNG investments is still possible as the lifetime of these assets are typically 30 years or more and most of the gas is sold under long-term contracts rather than spot prices.
However, there are no new greenfield projects scheduled to be approved in the next few years.
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