Delays, Labor Issues Blamed for Spiraling Gorgon Project Costs

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Researched by Industrial Info Resources Australia (Perth, Australia)--The massive cost blowout of Chevron's (NYSE:CVX) (San Ramon, California) Gorgon liquefied natural gas (LNG) project has received widespread global attention. Since the start of construction in 2009, the cost of Gorgon has ballooned from $37 billion to $54 billion, making it the world's most expensive LNG project.

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In addition to cost blowouts, the Gorgon project has been hindered by lengthy delays. Chevron has been forced to push back its initial 2014 target for first gas to the middle of 2015. Some experts do not expect Gorgon to become operational until the start of 2016.

There are many factors that can explain the problems at Gorgon, including high Australian labor and construction costs; restrictive government and environmental policies; and mismanagement from Chevron and the different contractors involved on Gorgon.

There are two common views in Australia about the underlying causes of the problems at Gorgon. Chevron has floated the idea that high labor wages and low worker productivity have been the primary reasons. This idea surfaced in April 2014, when Chevron Australia (Perth) Managing Director Roy Kryzywosinski said: "Rising labor costs and low productivity are hampering competitiveness... and crippling Australian industry."

There is a second view that has been raised by the Maritime Union of Australia (MUA). According to the MUA, Gorgon workers have been unfairly blamed for project time delays and cost blowouts. The MUA said it believes that mismanagement by Chevron and unnecessary government red tape can best explain the problems at Gorgon.

Both views contain elements of truth. The Gorgon project is incredibly complex. It is located in a nature reserve in a remote region of Western Australia, 200 kilometers northwest of Onslow. The remoteness of the Gorgon project means that labor and construction costs have been very high. The problem for Chevron is that Gorgon workers and the MUA have continued to demand higher wages and more flexible working rosters. According to some analysts, the wages of some trade workers have doubled since construction started in 2009. The refusal of Gorgon workers and the MUA to accept Chevron's most recent 2014 enterprise bargaining agreement (EBA) proposal has exposed the ongoing challenges faced by Chevron.

There also have been many examples where poor project planning from Chevron has caused costly time delays. One of the main logistical challenges at Gorgon has been the lack of loading space for cargo ships at Barrow Island. On some occasions, cargo ships have been forced to wait out at sea for weeks, while the loading bay is cleared for more space. It is estimated that Chevron is losing up to $600,000 a day while some cargo ships wait at sea.

Cost blowouts and time delays are common features of the seven other major LNG projects nearing completion in Australia, which also are tracked by Industrial Info. The rising costs of these projects have shown that Australia is an expensive place to do business, especially when considering that the cost of building comparable LNG projects in Canada--Australia's closest competitor--are 30% less expensive.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.