Gorgon Cost Blowout: $52 Billion Total Project Value

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Researched by Industrial Info Resources Australia (Sugar Land, Texas)--Chevron Australia Pty Limited (NYSE:CVX) (Perth) released its highly anticipated detailed cost and schedule review on the Gorgon project today. A $9 billion price hike brings the total estimated project value to $52 billion.

The Australian media have been running stories in varying publications this past month about the anticipated cost blowout, with a broad expectation that the total project value may have reached $60 billion. Chevron reports Gorgon project costs to its shareholders in U.S. dollars. Since project inception, the expenditures made on Gorgon have been in both U.S. dollars and Australian dollars. When the Gorgon joint venture partners reached financial investment in 2009, the estimated dollar figure was $37 billion.

Chevron has been developing the cost review since late July this year, and the news of the cost increase has, as expected, also included news of a delay in the Gorgon liquefied natural gas (LNG) production plant start-up. It was hoped that the first gas would be reached by the final quarter of 2014; this Australian milestone is now predicted for the first quarter of 2015.

The Gorgon project includes a 15.6 million-metric-tonne-per-annum LNG production plant; upstream facilities; carbon-capture storage; onshore and offshore pipelines; a 300-terajoule-per-day (or 285 million standard cubic feet per day) natural gas processing plant; a monoethylene glycol unit; a power station; and additional infrastructure at the downstream site on Barrow Island.

The island site is an A-grade nature reserve, and the Gorgon environmental management team has won awards for the extemporary maintenance of the natural environment and sustainable initiatives. Preserving Barrow Island with strict quarantine measures is one reason for the high cost increase.

The strong Australian dollar is to blame to a great extent; since the project's approval, the value of the Australian dollar has increased 20%. High construction and labor costs have been an outcome that is affecting the market in multiple industries in Australia. Other factors that have placed financial pressures on Chevron and project participants are logistics, delays due to weather, and the recent capacity increase from 5 million to 5.2 metric tons per year per train in the first-phase development.

Cost blowouts and schedule overruns on large-scale projects in the Oceania region are not unusual in the current industrial market.

For more information, see October 10, 2012, article - Gorgon LNG Production Plant to Grow to Four Liquefaction Trains, and August 10, 2012, article - Chevron Announces Detailed Cost Review for Australia's Gorgon LNG Project.

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