Chervon fuels Grogon cost blowout talk
Chervon fuels Grogon cost blowout talk

Chevron has began preparing investors for possible budget blow-outs at its Gorgon LNG venture on Barrow Island, admitting that labour costs are "trending higher" and pointing to a 20 per cent rise in the Australian dollar since the country's biggest resources project was sanctioned for development.

However, in a move that will be seen as pre-empting any investor backlash to an increase in project cost, Chevron has revealed design optimisations on the three-train Gorgon project had enabled nameplate production capacity to be increased from 15 million tonnes of LNG a year to 15.6mtpa. Also, Chevron reminded investors that oil prices were up 60 per cent since it, Royal Dutch Shell and ExxonMobil made their final investment decision three years ago.

When the partners reached FID in September 2009, Gorgon's forecast cost was $US37 billion, or $43 billion at the then exchange rate of US86 cent. About half of Gorgon's total cost is in Australian dollars.

Chevron does not hedge its exposure to the Australian dollar, which was worth $US1.048 last night.

"We're evaluating our performance to date and incorporating new information to update our expectations for the remainder of the project," Chevron's executive vice-president upstream and gas, George Kirkland, told analysts in the US on Friday night.

"Over the next few months, our assessments will help us gauge movements in costs, which we expect to provide towards the end of the year. "I would like to emphasise that our view of the Gorgon project has only been enhanced since FID. I remain very confident in the economics and the value created by this project.

"While we are seeing cost pressures, in large part associated with a 20 per cent strengthening of the Australian dollar, it's important to note that oil prices, which determine the project's revenue stream, are about 60 per cent higher than at the time of project sanction.

"Further, the development well results to date are encouraging, which has greatly reduced the reservoir uncertainty."

Mr Kirkland said Chevron remained confident Gorgon would achieve its repeatedly stated start-up schedule of late 2014, despite some weather-related delays on Barrow Island and productivity issues at one of its three supply bases, the Australian Marine Complex at Henderson south of Perth.

Chevron rarely discusses its Gorgon progress in detail. But underlining the mega project's importance even to one of the world's biggest oil and gas companies, Gorgon was a key topic during the session with analysts on Friday.

Mr Kirkland said Gorgon was more than 45 per cent complete and pointed to several areas of good progress. Construction of the LNG tanks on Barrow Island was sufficiently advanced for them to be taken off the critical path list, "which is unusual for an LNG project". Eight of 18 development wells had been drilled "and we're pleased with the sub-surface results we're seeing", Mr Kirkland said. Progress on the upstream facilities and subsea pipelines was on schedule.

Perth's oil and gas industry has been awash with speculation about cost blowouts since Gorgon was sanctioned, in part because of the complex logistics of building a mega project on a nature reserve. The speculation gained momentum when Woodside Petroleum was forced to admit a 20 per cent cost increase for its now-completed $15 billion Pluto LNG project.

The West Australian

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