UPDATE 2-Chevron adds $15 bln to Gorgon LNG project cost estimate

Wed Dec 5, 2012 6:04pm EST

* Higher labor costs, strong A$ boost costs

* Chevron's overall 2013 budget just shy of Exxon's

* Wheatstone LNG project in Australia still on budget

By Braden Reddall

Dec 5 (Reuters) - Chevron Corp added $15 billion to the cost of the Gorgon liquefied natural gas (LNG) export complex, as the U.S. oil company's largest single development joins a growing list of Australian LNG projects to run over budget.

The new $52 billion estimate for Gorgon, now 55 percent complete, came on Wednesday alongside Chevron's $36.7 billion overall 2013 budget for capital and exploratory spending. That compares with a 2012 budget of $32.7 billion, and is just shy of the $37 billion annual budget of far-larger Exxon Mobil Corp .

Like other Australian LNG projects, Gorgon's inflated cost is largely due to labor shortages, logistics challenges and the strength of the Australian dollar. Half of the six other LNG plants being built in the country have sustained cost increases averaging more than 20 percent.

Chevron said about one-third of the projected increase for Gorgon from its 2009 estimate of $37 billion, or A$43 billion, was due to the appreciating Aussie dollar and a change in the mix of currencies since the project was sanctioned. Start-up is still due in late 2014.

Chevron owns 47 percent of Gorgon, while Exxon and Royal Dutch Shell Plc each hold 25 percent stakes and the rest is shared by Japanese LNG buyers Osaka Gas, Tokyo Gas and Chubu Electric.

The updated cost figure for Gorgon, located on a remote island off Western Australia, is basically right in the middle of analyst estimates that ran from $45 billion to $60 billion.

Analysts and executives say the economics work out regardless, since Gorgon gas contracts are linked to oil. While the Aussie dollar has strengthened by about 20 percent since 2009, and half Gorgon's costs are in the currency, oil prices are up about 80 percent in that time.

Joe Geagea, head of Chevron's gas business, also points out there will be few competing LNG suppliers over the next few years. "I believe it will hit the market at the right time," he said in an interview in Tokyo.

Shipping LNG to Asian markets is now a hot topic, with Shell saying earlier on Wednesday it would move the headquarters of its integrated gas business to Singapore from Europe to account for the shifting center of gravity.

Also on Wednesday, the U.S. Department of Energy issued a highly anticipated report that found exporting LNG from the United States would benefit the country's economy more than it would harm it.

BEYOND GORGON

Australian cost inflation could be felt well beyond Gorgon. Chevron's $29 billion Wheatstone LNG, also in Western Australia, is due to start up in 2016, though Chevron signed off on that spending only a year ago when it had a better handle on costs, and the company said on Wednesday it remained on budget.

"Our exploration program continues to discover additional gas resources that could support future expansions of our Australian LNG developments," Chevron Vice Chairman George Kirkland added in a statement.

Chevron's overall LNG production, including Wheatstone as well as a delayed plant in Angola starting up next year, will grow to the oil-equivalent of 460,000 barrels per day (boepd) in 2017 from just under 200,000 boepd now. That is a huge contributor to Chevron's goal of increasing its overall output by 700,000 boepd to 3.3 million boepd over the next five years.

Apart from LNG, Chevron is going to spend heavily next year on three projects in the Gulf of Mexico: Jack/St Malo, Big Foot and Tubular Bells, with the first two due to start up in 2014.

Also included in its list of major projects were deepwater developments off Nigeria, the Chuandongbei natural gas project in China, Papa-Terra off Brazil, Hebron off the coast of Canada, the UK's Clair Ridge, and the Tengiz expansion in Kazakhstan.

Reflecting the San Ramon, California-based company's shift of focus away from refining, its "downstream" budget for 2013 is just $2.7 billion, down from $3.6 billion this year.

As for Gorgon, Chevron's struggles with cost are only exacerbated by the ambition of the project on Barrow Island. Bringing in materials from the mainland adds to cost, and the island is also Australia's most protected type of nature refuge, so Gorgon managers face tight environmental guidelines.

Also included in the price tag is the world's biggest carbon capture and storage project, which will collect up to 4 million tonnes of carbon dioxide a year in a reservoir under the island.

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