Chevron, Woodside face cost blowout at Wheatstone LNG project

Chevron and its joint venture partner Woodside face a massive cost blowout at their Wheatstone LNG project in WA.

Chevron’s Wheatstone LNG gas platform

US oil giant Chevron has logged a $US5 billion ($6.6bn) cost blowout at its Wheatstone LNG project in Western Australia, bringing total cost overruns at the seven LNG mega-projects approved during the resources boom to $49bn.

The Wheatstone cost overruns, resulting from engineering underestimates and equipment delays, mean Woodside Petroleum faces up to $US650 million ($855m) in extra costs on the Wheatstone stake it paid $2.8bn for in 2015. Woodside has already been forced to write down the asset by $US868m.

It follows $US17bn of blowouts so far on the Chevron-operated Gorgon LNG project and helps cement Australia’s reputation as the most expensive place in the world to build energy projects, with more than $200bn of LNG spending by global giants unlikely to come close to making their expected returns.

The other LNG blowouts have occurred at Woodside’s Pluto project in WA, Inpex’s Ichthys project in Darwin, Shell’s Queensland Curtis project, Santos’s Gladstone LNG project and Origin’s Australia Pacific project in Queensland.

The only other gas project is Shell’s Prelude floating LNG project, which has never publicly revealed its budget but is also believed to have blown out.

The Wheatstone overrun is partly because the amount of material needed to build the LNG plant was underestimated, which is embarrassing for Chevron because this was also one of the reasons for the Gorgon blowouts.

The Wheatstone problems were quietly mentioned by the oil major in a third-quarter conference call with US investors on Friday night, rather than officially recorded in its third-quarter report.

“Delay in (LNG plant) module delivery at Wheatstone has impacted project cost relative to the original 2011 estimate,” Chevron chief financial officer Pat Yarrington said in the report, referring to previously announced problems that had delayed first LNG by a year to mid-2017. But when pressed by analysts for more information, Ms Yarrington revealed that a second reason for the blowout was underestimation of materials that were required.

“At the time we took a final investment decision on Wheatstone, engineering was about 15 per cent complete and so the rest was based on rules of thumb,” she said.

“As we matured, the amount of quantities needed increased substantially ... (which) was something that we had seen on Gorgon as well, and it is one of the primary areas where we are trying to improve our project execution going forward.”

Other contributors to successive Gorgon blowouts were bad weather, delayed equipment and labour issues.

A Woodside spokeswoman said the Perth company was exposed to less than 13 per cent of the $US5bn blowout, which is its interest in the LNG project (not the Julimar gasfield it owns 65 per cent of and which was part of the deal) because of a differing basis for cost estimates. “We are analysing the details and will provide further guidance if required. Woodside sees long-term value in the Wheatstone Project, which will deliver 13 million barrels of oil equivalent of annual production,” she said.

Speaking to The Australian two weeks ago, Woodside chief financial officer Lawrie Tremaine played down the impact of any cost changes on Woodside.

He said that when Woodside made its acquisition, and estimated it had $US1.86bn of spending to go on top of the purchase price, it used its own estimates, rather than Chevron’s 2011 budget.

“Relative to our guidance, we think we’re not in a materially different place, so there’s no cause for concern,” Mr Tremaine said at the time, adding they were yet to receive a detailed cost update from Chevron.

On a brighter note for Chevron, Ms Yarrington announced the second of three LNG production trains at Gorgon, Australia’s most expensive resources project, had started this month.

The first train is now running at full capacity of 5 million tonnes of LNG per year, or 110,000 barrels of oil equivalent a day, she said.

Despite the cost blowouts, Chevron’s latest annual report calculates that its stakes in the two projects will deliver the company future cashflows of nearly $US50bn at average oil prices of $US55 a barrel.

Over the weekend, Woodside announced it had completed its $US440m acquisition of ConocoPhillips’ 35 per cent stake in deepwater oil blocks of Senegal that include the SNE and FAN discoveries.

The price is up $US10m from the July deal announcement and the statement did not say whether conditions, including government of Senegal approval, had been met.

Melbourne’s FAR Limited, which owns a stake in the blocks, said it was still in dispute with ConocoPhillips over whether pre-emptive rights had been correctly observed.,

“FAR is unaware of any approval granted to ConocoPhillips in relation to the proposed transaction with Woodside,” a FAR spokesman said.

Meanwhile, the value of investment projects under way across Australia has fallen over the past year, driven mainly by ongoing concerns over the performance of the domestic economy.

A new report published today by Deloitte Access Economics says that the value projects recorded under its Investment Monitor are worth $810.9bn, down 1.4 per cent in the September quarter compared to three months earlier, and off 0.4 per cent on the same time last year.

“Engineering construction has continued to shrink as mining investment slides, with engineering construction work done falling to the lowest levels seen since late 2010,” the report says.

“The worst of the falls have already occurred, but there is still more to come as massive gas projects finish up construction and move into production.”

Additional reporting: Scott Murdoch