Home
Spectators
Alan Kohler

Robert Gottliebsen

Stephen Bartholomeusz

Stephen Koukoulas

Jessica Irvine

Rob Burgess

Steve Keen

Michael Gawenda

Oliver Marc Hartwich

Ben Potter

John Lee

Tristan Edis

Supratim Adhikari

Jackson Hewett

The Distillery

Scoreboard

Keith Orchison

The Conversation
Alan Kohler
Alan Kohler is one of Australia’s most experienced commentators and journalists. Alan is the founder of Eureka Report, Australia’s most successful investment newsletter, and Business Spectator, a 24-hour free business news and commentary website. He also hosts Inside Business, a half-hour Sunday programme on the ABC, is the finance presenter on the ABC News - and producer of the nightly graph (or two).
Economy
Australian News

Global News
European Crisis

Global Financial Crisis

US Economy

Asian Economy

China

Commodities

Interest Rates

Tax

Productivity

Leadership

Innovation

Reserve Bank of Australia
Latest stories
WEEKEND ECONOMIST: Slip, slipping away
The federal budget revealed a worrying trend for the Australian economy, with disinflation a factor in the revenue slippage that led to the deficit.
Delinking indicators warn of a fractured system
The long-standing correlation in global economic data is being challenged. It reveals profound tensions underneath the world's central bank-inspired stability.
Markets
ASX
ASX Indices

Major ASX stocks

Markets Spectator

Breakfast Deals

Currency

ETFs
Latest stories
MARKETS: Riding the emotional waves
Hedge fund manager David Hobart says the key to investing is being aware of the emotions that drive markets – and how you manage your own.
MARKETS SPECTATOR: The local yield story is over
Tim Toohey says yield hungry investors will search outside Australia for markets that offer better returns.
Politics
Australian Election

Federal Budget

International News
Asia

Europe

USA

National Affairs
Latest stories
A subtle shift for Abbott's razor gang
After months of campaigning against 'wasteful' Labor management, Tony Abbott will be aware similar scrutiny will apply to his government, should the Coalition win.
WEEKEND ECONOMIST: Slip, slipping away
The federal budget revealed a worrying trend for the Australian economy, with disinflation a factor in the revenue slippage that led to the deficit.
Technology
NBN Buzz

Mobility

BYOD

Smart Devices

Emerging Tech

Applications

Big Data

Cloud Computing

Data Management

Reviews

Social Media

Start-ups

Security

Data Security

Identity Management

Wireless Security

Telecommunication
Latest stories
Why Google Music's stuck on repeat
Google's new product announcements typically impress. But this latest announcement about Google Music shows that the company is happy to copy other incumbents and not blaze its own path in the digital music scene.
The evolution of the social media advisor
The newly created role of the social media adviser is one shrouded in mystery. Part PR, part digital media specialist, it's yet to fully understand its place in Australian politics.
Climate
Carbon markets

Energy markets

Renewable energy

Resources

Solar energy

Wind power

CleanTech

Science & Environment

Green Deals

Policy & Politics

Smart Energy
Latest stories
Is this the end for Labor's 'CarbonChoices'?
Whispers in Canberra suggest Bill Shorten is canvassing the numbers for support on a huge Labor carbon pricing backflip after the election.
Obama's climate agenda nears judgment day
The US Supreme Court's decision whether to take up any of the petitions against climate change regulations could shape or shatter the Obama administration's efforts to solidify its climate change agenda.
Industries
Advertising and Marketing

Agribusiness

Automotive

Aviation

Construction and Engineering

Education

Family Business

Financial Services

Food and Beverages

Gaming and Racing

Health and Pharmaceuticals

HR

Industrial relations

Information Technology

Infrastructure

Insurance

Manufacturing

Media and Digital

Resources and Energy

Professional Services

Property

Retail

Telecommunications

Transport and Logistics

Small Business (SME)

Tourism
Video
CEO Hub

KGBTV

Leadership Lab

Management Insights

Young Leaders

EurekaTV
Latest videos

How to build a service business in China

King and Wood Malleson's China Partner David Olsson explains how Australian companies can tap into the huge demand...

KGB: ANZ CEO , Mike Smith

KGB: Mike Smith
Knowledge Centre
Investment Tips

Webinars

eBooks
Featured stories
Download the December CEO Pulse survey
CEOs outline changing views on corporate spending and profits, their economic expectations and political dissatisfaction, including advice for Julia Gillard and Tony Abbott.

TECHNOLOGY SPECTATOR: The audacious app trying to take over TV
UK-based Zeebox wants to be the intermediary for all social media-television interactions. It will not only have to lure viewers, but the networks themselves.

Gas still gold despite Chevron's big bill

Stephen Bartholomeusz6 Dec 2012, 12:26 PM1

Despite a staggering 40 per cent cost blowout, and the looming danger of short-sighted state government-led anti-competition measures, Chevron's Gorgon project, and LNG in general, presents attractive economics.

You must be logged in to read this article

Not a member yet? Register today ›

Business Spectator is available on all of your devices so you can access the latest news and commentary where and how you like

Register now ›

Chevron’s confirmation of a massive blowout in the cost of its Gorgon LNG project off Western Australia encapsulates the issues confronting the resources sector as it shifts from its frenzied price-driven phase to a more mature and sober stage.

While the massive escalation in the cost of the project wasn't quite as dire as some had forecast – there was some speculation that a project planned to cost $43 billion might end up costing as much as $60 billion – it is, nevertheless, staggering.

Chevron said overnight that Gorgon was now expected to cost $52 billion, a $9 billion or 20 per cent increase in the projected cost. Strikingly, however, the blowout is far worse in US dollar terms which, given that Gorgon, like all big resource projects, will generate US dollar revenues, is the more pertinent number.

A project that was planned to cost $US37 billion is now expected to cost $US52 billion, or $US15 billion – 40 per cent – more. That underscores the dramatic shift in the currency relativities since that period pre-crisis when Chevron committed to Gorgon and the impact it has had on projects viewed through a US dollar lens. Gorgon has been under construction for the past three years and is now about 55 per cent complete.

Chevron said the stronger Australian dollar and changes in the mix of currencies since the project was sanctioned accounted for about a third of the projected increases in US dollar outlays.

There isn’t that much anyone can do about the currencies but Chevron attributed the real core of the increase in costs to labour costs, productivity at the Barrow Island site, logistics challenges and weather.

There is some hope that with the resources investment boom now deflating quite rapidly the intense competition for labour and resources that forced up development costs so dramatically will also wane, although the number of LNG projects still under construction or committed off WA and onshore in Queensland means there is a particular and continuing issue in that sector which demands attention from policymakers and the companies themselves.

It won’t help those projects if the lobbying for "reserving" of gas for domestic use gains traction, or if state governments prioritise onshore investment and state royalties over the most efficient developments and the long-term national interest in creating low-cost and globally competitive projects.

The proponents of reserving effectively want to get access to the gas at significantly less than its market value in what is effectively a new form of protectionism.

The royalty and onshore investment issues are a factor in the WA government’s opposition to Shell’s floating LNG technology, which could radically lower development costs, and its preference for a controversial onshore processing facility at James Price Point.

The more positive news out of Chevron came from its vice chairman, George Kirkland, who made the point that, while the currencies may have moved against the project since it was sanctioned, the oil price has moved even more significantly in its favour, rising 80 per cent over the period. LNG prices are strongly linked to oil prices. He also said the LNG nameplate capacity had increased by 4 per cent a year.

While, in the light of the US shale gas revolution, there has been a lot of debate about the potential impact of that gas on the Asia Pacific LNG market and the pricing of LNG, there is a conviction in the industry that only a relatively small proportion of that gas will find its way into the international market.

There are US domestic political and economic – and geopolitical – reasons why the US is likely to maintain a reserving policy and be cautious about approving export terminals for shale gas-based LNG. At present, approval for only one new terminal, in Louisiana, has been granted although there are about 17 more applications in the pipeline.

Despite some attempts by Japanese buyers to de-link LNG pricing from the oil price, all the long-term supply contracts that underpin the LNG projects having pricing mechanisms mainly related to the oil price so the likelihood of a fundamental change to the pricing structure in the near to medium term is low.

As Kirkland said, despite the cost blowout, the economics of Gorgon and other LNG projects remain attractive. Chevron is also building another $29 billion LNG project, Wheatstone, off Western Australia, which is only 7 per cent complete but is, for the moment at least, on-schedule and on-budget.

The legacy of the mining segment of the resources investment boom – which has ended with a slew of projects being withdrawn from the investment pipeline and left newly-constructed projects with inflated capital and operating costs that have undermined their international cost competitiveness even as the sector’s drivers shift from commodity prices to volume – is instructive.

There are still a number of massive prospective new or expanded LNG projects on the drawing boards or on the verge of final investment decisions and the experience of the mining industry ought to be drawn on to ensure that those projects are not only built but have economics robust enough and competitive enough to weather whatever the LNG market might throw at them over the next decade or two.

Low-cost producers – and until the commodity price boom most of the larger Australian resource companies were low-cost producers – can survive most market conditions.

Comments on this article

Comments Policy

George Ossolinski, Fri, 2013-02-22 04:21

Stephen, you wish to sell all the gas offshore without any reserve for Australia. This is crazy and it shows no foresight into using the gas, at a discounted cost, to establish Australian industry (Gas still gold despite Chevron's big bill, December 7). Its a good thing the West Australian Premier is trying to get a percentage of this gas and also is against Shell removing it by boat without any Australian involvement at all.

The Spectators

A subtle shift for Abbott's razor gang
Mitchell Neems 17 May, 7:33 PM | 9
After months of campaigning against 'wasteful' Labor management, Tony Abbott will be aware similar scrutiny will apply to his government, should the Coalition win.
WEEKEND ECONOMIST: Slip, slipping away
Bill Evans 17 May, 6:50 PM | 8
The federal budget revealed a worrying trend for the Australian economy, with disinflation a factor in the revenue slippage that led to the deficit.
Broken Glass won't hurt gung-ho Google
Ben Shepherd 17 May, 5:57 PM
So far Google Glass has been underwhelmingly modeled by unfashionable white men. But Google continues to outshine its tech-giant peers in the media with its boldness to innovate.

Index	Last	Chg	% Chg
DOW JONES	15354.40	+121.2	+0.8
S&P 500	1667.47	+17	+1
NASDAQ	3498.97	+33.7	+1
FTSE 100	6723.06	+35.3	+0.5
NIKKEI	15138.12	+100.9	+0.7
Hang Seng	23082.68	+38.4	+0.2

Latest stories

Latest stories

Latest stories

Latest stories

Latest stories

Latest videos

Featured stories

Gas still gold despite Chevron's big bill

You must be logged in to read this article

Not a member yet? Register today ›

Already a member? Sign in here

More from Stephen Bartholomeusz

Connect with Stephen Bartholomeusz on Google+

Related articles

More from Business Spectator

Comments on this article

Information

Policies

Advertising

BS Main menu

User login