* Latest Asia-Pacific LNG project to report cost overruns
* Forex, work stoppages fuel $3.3 bln jump in project cost
* Shares fall in Australian partners Santos and Oil Search
* PNG LNG is nation's biggest-ever resources development
* First LNG shipments still expected in 2014
SYDNEY, Nov 12 Exxon Mobil said it faces
a $3.3 billion spike in costs at its LNG project in Papua New
Guinea, the latest Asia-Pacific project to be hit by cost
overruns as competition is set to grow from new gas supplies
coming on tap in North America and Africa.
The more than 20 percent jump in costs to $19 billion was
blamed on unfavourable foreign exchange rates and delays caused
by disgruntled workers and landowners, and comes after costs to
develop liquefied natural gas (LNG) projects in neighbouring
Australia to supply the Asian market have also shot up.
Exxon told its partners in a letter published on Monday the
project remained on schedule for start-up and delivery of gas in
2014 and forecast production capacity had been increased by 5
percent to 6.9 million tonnes per year.
The PNG LNG project is the impoverished nation's
biggest-ever resources development and could lift GDP by 20
Papua New Guinea has struggled to attract foreign investment
to exploit its abundant natural resources due to corruption and
Shares in the two Australian partners in the project, Oil
Search and Santos, tumbled 5.2 percent and 2.4
"International groups partnering with Australian companies
into these projects are starting to feel the high cost
environment," Peter Esho, chief Market analyst at City Index
Group Sydney, said in a note.
LNG plants are notorious for running overbudget and missing
schedules. In Australia, three out of seven projects under
construction have announced hikes of an average of over 20
percent, while a fourth is conducting a cost and schedule
Developments in Australia have primarily faced cost jumps
due to increased labour costs, a high Australian dollar, and
stiff competition for resources.
Strong demand from Japan and other Asian countries has
helped lift the prospects of LNG projects in Asia-Pacific, but
competition is also heating up with new supplies set to emerge
from North America and East Africa.
Oil Search said the increase in the final estimated costs at
PNG LNG was "considerably beyond the upper end" of its
"Oil Search intends to fully review the revised estimates
and is committed to working with the operator to seek to
mitigate these estimated cost increases," Oil Search Managing
Director Peter Botten said in a statement.
The firm said it expected the increase would be funded in
line with the project's existing finance terms of 70 percent by
debt and 30 percent by equity contributions from the projects
FX BIGGEST PART OF COST RISE
Santos said it had ample liquidity to fund its
"With over $6 billion in cash and undrawn debt facilities,
Santos is in a strong position to fund all of its capital
programs," Santos Chief Financial Officer Andrew Seaton said.
"Even including the higher costs, PNG LNG remains a highly
robust economic project."
Oil Search said that foreign exchange was the single biggest
cause of the cost increase at $1.4 billion at PNG LNG.
The Papua New Guinea kina has risen 20 percent against the
U.S. dollar in the last 19 months, while the Australian dollar
has held above parity to the U.S. currency.
Both Australian partners said they were assessing the impact
of currency exchange movements on their overall costs, though
much would depend on the eventual U.S. dollar gas sales
contracts closer to the project's completion.
"Santos is well positioned to manage the impact of a strong
Australian dollar on project capital costs," a Santos spokesman
said, adding that its Australian dollar denominated balance
sheet, cash balances and revenues provided an effective natural
Delays from work stoppages and land access issues had also
pushed up construction and drilling costs, adding $1.2 billion
to the total.
Landowner protests against the project this year prompted
the government to deploy troops to "restore law and order",
according to local media reports.
Also, the impact of above average rainfall for most of the
last two years, was estimated to have added $700 million.
"Despite the cost increase, project economics are helped by
the 5 percent increase in plant capacity and approximately 30
percent increase in commodity pricing since project funding in
2009," Decie Autin, PNG LNG Project Executive, said in a
Exxon Mobil five years ago shelved a troubled
PNG-to-Australia gas pipeline project after cost overruns pushed
the cost of development to more than $3.5 billion. Exxon and its
partners at the time said they would focus on more profitable
gas projects in the country, including PNG LNG.
The energy major said last month it would make a decision on
developing the Scarborough gas field, considered one of the
toughest projects in Western Australia, around the second half
of 2013. Exxon has said it will weigh the development of
Scarborough and any other new LNG project against potential
exports of cheaper North American LNG.