LNG cost blowouts jeopardise Australia’s future

Gorgon LNG Project costs estimated to increase by $20 billion

Australia’s biggest resource project, the Gorgon liquefied natural gas (LNG) plant, could see costs blow out from the current $43 billion to more than $60 billion. This is due to higher costs, productivity issues and the high Australian dollar.

According to the Australian Financial Review, Gorgon LNG faces a $20 billion cost blowout, but will still go ahead, as it’s too late to pull out of the project. US oil giant, Chevron is expected to reveal the massive cost increase before the end of the year, as well as a possible delay in production of gas until late 2014.

Related: The $164 billion risk to the economy

On Monday, ExxonMobil, Oil Search Limited (ASX: OSH) and Santos Limited (ASX: STO) increased the cost estimates for the PNG LNG project from US$16 billion to US$19 billion, due to the high Australian dollar, bad weather and logistical issues.

BG Group and Santos both lifted the costs of their Queensland based LNG projects earlier this year, while Woodside Petroleum’s (ASX: WPL) Pluto LNG project is estimated to have run a third over budget, and started 16 months late. Origin Energy (ASX: ORG) has conceded that its Australia Pacific LNG project has been hit by the high Australian dollar.

Gas and LNG projects were viewed as being the next boom for Australia, following the end of the mining boom – with more than $164 billion being invested in new projects that would see Australia become one of the largest suppliers of LNG in the world, if not the largest, by 2020.

The cost blowouts are not just the only threats. Recent discoveries of massive gas fields off the coast of Africa and potential US gas exports also pose a risk to Australia’s LNG industry. That could result in expansion plans being delayed or cancelled, and some projects, such as Woodside’s Sunrise LNG project, not to go ahead at all.

The Foolish bottom line

A falling Australian dollar would do much to alleviate some of the costs, but it appears that labour costs in Australia are too high and we risk losing significant amounts of investment capital to other regions.

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Motley Fool writer/analyst Mike King owns shares in Woodside Petroleum. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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