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Exxon PNG Gas project blows out to $19 billion

By Ross Kelly

SYDNEY -- Exxon Mobil  said the cost of building a natural gas export facility in Papua New Guinea had blown out to $19 billion, as the project was impacted by exchange rate movements, local landowner disputes and torrential rain.

The cost of the project would be $3.3 billion higher than the last estimate, the world' s biggest listed oil company by market value said in a statement. The facility was 70% completed and on track to ship the first cargos to China, Japan and Taiwan in 2014, it added.

Exxon said that the cost overrun would be offset by higher output capacity of 6.9 mmtpa, up from 6.6 mt, along with a 30% jump in LNG, prices since construction began in 2009.

Despite the cost increase, it' s still the most profitable project under construction in the region, said Matthew Howell, an analyst at energy industry consultancy Wood Mackenzie. "We don' t see the increase affecting its commercial viability."

Even so, the ballooning budget highlights the mounting cost pressures faced by global oil companies including Chevron and Shell as they seek to tap rising Asian demand for cleaner burning fuels by building export terminals in places like Australia and Papua New Guinea that chill natural gas into liquid before exporting it in tankers.

Earlier this year, Chevron said it was reviewing costs at the $44.7 billion Gorgon LNG, project in Western Australia state after a 20% gain in the Australian dollar since construction started in 2009. Exxon and Shell are also large investors in Gorgon.Chevron chief executive John Watson said in a recent interview that the company had decided not to hedge foreign currency risks as Australia' s economy was heavily reliant on the resources sector, which meant energy prices were likely to rise in step with the Australian dollar and boost revenue from Gorgon.

The cost blowout at the so called PNG LNG project is the second increase only last year, the company raised the cost estimate to $15.7 billion from an initial $15 billion.

The increases underscore the unique challenges faced by companies doing business in Papua New Guinea, an impoverished Pacific nation better known for its jungles and lawlessness.

Exxon operates and owns 33.2% of PNG LNG, while Australia' s Oil Search and Santos own 29% and 13.5%, respectively. The balance is mostly spilt between the local government and dozens of landowning tribes that frequently stage protests and even carry out violent attacks against what they see as an unfair distribution of benefits from the project.

The country also presents logistical challenges, including transporting gas from the country' s highlands to the coast via a 190 mile pipeline that traverses rugged terrain up to 650 feet above sea level. From the shore, it has to be transported by a 250 mile subsea pipeline to a gas processing terminal.

Foreign exchange accounted for $1.4 billion of the latest cost increase, according to Oil Search. Work stoppages and land access disputes, meanwhile, added $1.2 billion to the overall increase, Oil Search said.

Another $700 million was pinned on adverse logistics and weather conditions, including rainfall that Exxon said exceeded historic norms for most of the last two years.

Dow Jones Newswires

11/12/2012

 

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