Cost overruns near $50bn as Australias LNG boom falters

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https://www.ft.com/content/29667e96-9f15-11e6-891e-abe238dee8e2

The total value of capital expenditure overruns in Australias 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
Australias LNG (https://www.ft.com/stream/organisationsId
/TnN0ZWluX09OX0FGVE1fT05fMzU4NzE=-T04=) industry is being squeezed at a
time when it is poised to overtake Qatar as the worlds 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.

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Cost overruns near $50bn as Australias LNG boom falters

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https://www.ft.com/content/29667e96-9f15-11e6-891e-abe238dee8e2

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 (http://next.ft.com/content/2c4cfbe4-4481-11e4-ab0c-00144feabdc0) 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 (http://next.ft.com
/content/e97a9188-f0a4-11e5-aff5-19b4e253664a), 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, Chevrons 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,

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Cost overruns near $50bn as Australias LNG boom falters

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https://www.ft.com/content/29667e96-9f15-11e6-891e-abe238dee8e2

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.

Chevrons 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.

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Cost overruns near $50bn as Australias LNG boom falters

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https://www.ft.com/content/29667e96-9f15-11e6-891e-abe238dee8e2

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).
Woodside profits halve and
Santos swings to loss as crude
prices stay low

Chevron and other operators say a profitable

return (http://next.ft.com/content
/fe97eeb0-65a9-11e6-a08a-c7ac04ef00aa) 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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01-Nov-2016 12:01