LNG Projects Are Encountering Some Big Problems

The global rush to monetize liquefied natural gas has to some extent slowed during the past year or so, as project costs spiral out of control and even some of the world's largest oil companies buckle under the huge logistical problems arising during development.

Trying to get away
Woodside Petroleum (NASDAQOTH: WOPEY  )
, one of Australia's largest oil and gas producers, announced earlier this year that it wanted to construct a floating LNG plant to develop the Browse gas fields off Western Australia to try to beat high labor and construction costs. However, since then the company has been forced to cancel its $45 billion Browse project, stating that it was no longer economically viable. 

Meanwhile, Chevron (NYSE: CVX  ) is facing yet more cost overruns on its Gorgon LNG project on Barrow Island. According to some, Chevron's latest internal cost review is expected to place a final cost on Gorgon of around $59 billion, 13% higher than the previous cost revision taken back at the end of 2012.

Originally, at conception, the project was expected to cost only $37 billion. However, the project is already 60% over budget and time delays have now threatened the plant's first LNG production date, which was supposed to be during 2015. It is now expected that production will be pushed back to 2016. With costs expanding rapidly, it is likely that the final cost of this project could be more than double its original estimate.

Sharing the pain
Chevron only holds a 47.3% share in Gorgon. The rest of the project is split between peers ExxonMobil (NYSE: XOM  ) (25% ownership) and Royal Dutch Shell  (NYSE: RDS-A  ) (25% ownership), neither of which are having much success themselves in the development of LNG projects.

At the end of August, Exxon reported that costs at its PNG gas project in Papua New Guinea had grown to $19 billion, 21% higher than the last estimate of $15.7 billion. This is partly due to exchange rate fluctuations. Still, Exxon has been able to offset some of the rising costs by adapting the project to deal with additional output. A 5% increase in plant capacity from 6.6 million tons to 6.9 million tons should, according to the company, "improve financial returns."

Initially, the PNG project was expected to cost only $15 billion.

Over the life of the project it is estimated that around 9 trillion cubic feet of gas will be produced and sold. Although the project is expecting to export to Asia, based on current EIA data, at the end of June, the average import price for LNG was $4.60 per thousand cubic feet. Based on this data I believe the project could generate $41.4 billion in revenue over its lifetime, double even the new higher cost; note this does not include operating costs.

Relationships are falling apart
Shell on the other hand is facing bigger problems. The company owns a strategic interest (23%) in Woodside Petroleum, however, after a number of cost overruns and project cancelations, according to Shell, the Woodside stake is "no longer strategic."

It's obvious Shell wants out of Woodside after the company's constant underperformance. However, at Shell's annual general meeting this year CFO Simon Henry told reporters, "We're not going to sell below value." Shell has already sold part of its Woodside stake but this was back in 2010, for 42.23 Australian dollars per share. So, it is likely that Shell wants to see Woodside's stock price above A$40 before it sells the remainder.

Foolish summary
So overall, with costs exploding, relationships falling apart, and projects being abandoned, it would appear that the global LNG boom has come to somewhat of a standstill. That said, Exxon's PNG project still looks like it could become profitable during its lifetime if the company can stop construction costs from rising further and keep production costs down. 

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10/21/2014 4:00 PM
CVX $115.09 Up +3.60 +3.23%
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