Many investors will have heard about the crippling cost overruns currently affecting the capital projects of many oil and gas majors. However, looking at current forecasts, it appears as if many of these projects will be justifiable for the long term.

For example, one of the regions where cost overruns are most prolific is Australia, where spiraling wage costs are blowing apart the carefully planned budgets of liquefied natural gas, or LNG projects. Chevron (CVX 1.20%) has borne the brunt of this, reporting that its Gorgon LNG project had seen costs spiral from the initial estimate of $37 billion, projected back in September 2009, to a current figure of $52 billion. This extra $15 billion is not small change, even for Chevron.

Constricting growth
These overruns, according to some, are due to the high cost of labor within Australia along with a strong Aussie dollar. Poor rates of productivity have also seen the first expected date of export from the site pushed back to the first quarter of 2015 instead of late 2014.

It's not just Chevron that is feeling the pressure. Gorgon is a joint project between ExxonMobil (XOM 0.57%), which owns a 25% share, and Royal Dutch Shell (RDS.A), which also owns a 25% share. However, Shell is feeling the pressure in other regions such as its Arrow LNG plant, which it is considering shelving due to rising costs.

But while these projects are being cancelled, there are signs starting to emerge that the market for LNG is actually heating up. In particular, according to Bank of America and Bloomberg, the price of LNG is poised to reach a record high within Asia during the next few months as consumption grows five times faster than supply.

Rising demand
Demand for LNG is measured by growth in regasification terminals, the capacity of which is expected to rise five times faster than supply though 2014. This is leading some analysts to highlight their concerns about the lack of LNG supply as projects like Arrow are cancelled and come online delayed. Indeed, no serious increase in supply is expected until 2015 when major projects such as Gorgon will come online.

Of course, tighter supply and rising demand mean higher prices, and this is exactly what's happening. Indeed, according to The Wall Street Journal, spot LNG prices for delivery in the second half of December hit $17.90 per million British thermal unit at the beginning of this month, up around 28% year on year.

Floating
Industry behemoth Exxon may have already foreseen this trend and is taking steps to ensure that it gets LNG to customers without costly delays. The company recently won approval for a floating LNG project on a gas field off of Western Australia. The project is not expected to come online until 2020. However, Exxon's plan to build a floating LNG plant may be 20% cheaper than building onshore and should help the company to avoid many of the high-wage, low-productivity costs that have affected other players.

Indeed, according to analysts at Deutsche Bank, a conventional, onshore LNG plant would cost around $3.6 billion to build for every million tonnes of output per year. In comparison, a floating project would only cost $2.9 billion to construct for a similar output.

The prelude
This is a route that Shell has already traveled, constructing the world's first floating liquefied natural gas facility, Prelude FLNG, off Australia's northwest coast. The scale of this project is, in a word, huge: The Prelude vessel is going to be longer than 450 feet but with as much capacity as a conventional plan, albeit with a lower price tag.

Prelude is the first of many FLNG vessels and should allow Shell to participate in the LNG boom while cancelling, or scaling back, some of its onshore projects.

Foolish summary
So overall, the development of LNG projects within Australia is being hampered by rising wage costs, slow productivity, and a strong Aussie dollar. However, the development of new technology along with rapidly rising LNG prices within Asia indicate that in the long term, these short-term costs may actually pay off.