UPDATE 3-Conoco, Origin expand Australia LNG project despite cost pressures

Wed Jul 4, 2012 12:53am EDT

* Companies approve second train for LNG project

* Approval allows Sinopec to lift ownership to 25 pct from 15 pct

* Origin says project cost $23.6 bln, cites cost challenges

* Origin to offer further 7.5 percent of equity

By Rebekah Kebede

PERTH, July 4 (Reuters) - ConocoPhillips and Origin Energy approved on Wednesday a second train at the A$23 billion ($23.6 billion) Australia Pacific LNG project, despite concerns over rising costs and gas shortages in the country's coal seam gas sector.

The approval also paves the way for partner Sinopec to increase its ownership to 25 percent from 15 percent, the companies said.

The venture is one of three coal seam gas to liquefied natural gas projects worth over $50 billion currently underway in Queensland state and the approval of a second train comes as other projects have faced hurdles, including a spike in costs.

Origin Energy said that there had been no significant change in costs estimated for APLNG, although warned it might not continue to be immune from future cost pressures.

"We've got the better part of three years to go and a substantial part amount of the actual expenditure ahead of us and it would be simply wrong to suggest that we can guarantee today that we will not experience our share of those challenges," Origin's managing director Grant King told reporters on a conference call.

Ryan Lance, Conoco's chairman and chief executive, said the second train was the final step in the approval process.

"From this point we are committed to the development and construction of all infrastructure and facilities to ensure the first delivery of LNG in 2015," Lance added in a statement, noting the second train will begin exporting LNG a year later.

An LNG train is a plant that chills gas to liquid form for shipping and APLNG made a final investment decision on the first train last year, delaying a decision on the second train.

Origin said its share of the project costs would be funded by selling off a further 7.5 percent of equity in APLNG. In January, Sinopec paid $1.1 billion to raise its stake by 10 percent.

Origin and ConocoPhillips each hold 37.5 percent equity in APLNG.

COST PRESSURES

Coal seam gas operators are aiming to drill tens of thousands of wells targeting methane held in coal beds, which is then converted to LNG.

But there have been concerns that some projects are struggling to find enough gas that has already been pre-sold to customers, pushing up already rising costs being driven by factors as labour shortages.

Origin Energy said that there had been no significant change in the $20 billion project costs estimated for APLNG in 2011 when the joint venture approved the first train other than changes due to foreign exchange rates.

In December 2011, when the joint venture was budgeting costs for the project, $20 billion converted to A$23 billion based on forward currency contracts, Origin said.

Two other coal seam gas project operators, Santos and BG Group, recently announced cost increases. Santos last week increased its cost estimate for its Gladstone LNG project by 15 percent and BG Group increased the cost estimate for its Queensland Curtis Island project by 36 percent earlier this year.

NO EXPANSION?

According to some analysts, Origin is better positioned than the other two coal seam gas projects underway, with richer gas fields that do not require as much drilling, which will likely keep a tighter lid on costs.

The fact that other coal seam gas operators are searching for gas could provide an alternative outlet for expanding the plant from the 9 million tonne per year production provided by two trains.

"We actually don't need another train to have the capacity to commercialize more resources," Origin's executive director of finance and strategy, Karen Moses, told reporters.

APLNG is currently permitted to have an additional two trains to produce a total of 18 million tonnes per year and Origin has already sold some gas to both BG and Santos.

Most of the plant's production will be sold to Sinopec through a 20-year deal for 7.6 million tonnes per year of LNG purchases, starting in 2016.

The agreement, which Origin said was the largest Australian LNG supply agreement to date, will help supply China's rapidly growing demand for LNG as it switches to cleaner burning fuels.

APLNG also has a supply agreement with Japan's Kansai Electric for 1 million tonnes of LNG per year from 2016.

Origin shares rose 4.5 percent to A$12.88 by early afternoon trading.

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