November 12, 2012 8:46 am

Exxon warns of cost blowout at PNG LNG

ExxonMobil, the world’s biggest oil company by market value, has warned of a $3.3bn cost blowout at its liquefied natural gas project in Papua New Guinea but says it is still on course to start deliveries to customers in China, Taiwan and Japan in 2014.

Foreign exchange fluctuations accounted for about half of the jump in costs to $19bn, Exxon said on Monday, while delays due to work stoppages and land access issues, which contributed to increased drilling and construction costs, added a further $1.2bn. The company blamed adverse weather conditions, including rainfall exceeding historic norms for the past two years, for another $700m of costs.

The project, known as PNG LNG, is a joint venture between Exxon and several partners including ASX-listed Australian companies Santos and Oil Search. It is PNG’s biggest resources project to date and is expected to produce 6.6m tonnes of LNG a year when complete.

Last year, Exxon was forced to raise the cost estimates for the project to $15.7bn from $15bn because of adverse foreign currency movements. In total, foreign exchange has added $2.1bn in increased costs. According to local press reports, Exxon has not put in place hedging contracts because of its project financing agreements.

Cost increases have also plagued several large LNG projects in Australia, although the overruns have been as much to do with construction costs and labour shortages as with currency.

Peter Botten, Oil Search managing director, said the increase in estimated final costs for PNG LNG was “disappointing” and was at the “upper end of what might have been expected” from cash drawdowns and project progress to date.

“In addition, the estimated foreign exchange impacts and the amount allowed for additional contingency is higher than we would have anticipated,” said Mr Botten.

Both Oil Search and Santos said they had ample liquidity to fund increased equity contributions. Thirty per cent of the cost increase will be funded by cash injections from the joint venture partners and the rest from debt.

Decie Autin, project executive for PNG LNG, said that although costs had risen, the economics of the project had been helped by increases of 5 per cent in plant capacity and 30 per cent in LNG prices since 2009. She said the project was now 70 per cent complete and the delivery of the first LNG cargo was on schedule for 2014.

Shares in Santos fell 2.2 per cent on Monday in Sydney while Oil Search lost 3.4 per cent.

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