Chevron approves $37 bn Gorgon LNG project

Chevron approves $37 bn Gorgon LNG project

Perth: Chevron Corp and its partners gave a formal green light to building the Gorgon liquefied natural gas project in Australia, the world’s biggest new development, at a lower than estimated cost of $37 billion.

Monday’s final investment decision, widely expected after the project cleared a series of key regulatory hurdles last month following years of review, is the starting gun on a project that will generate huge revenues for contractors and deliver some 8 percent of the world’s LNG when it begins production in 2014.

The decision underscores a growing appetite for gas in the Asia Pacific region and heralds a shift in the hierarchy of Asian consumers that will see China overtake Japan as the dominant LNG buyer, a strategic position that gives China increased bargaining power as it chooses which project to back.

Gorgon will also put pressure on about a dozen other LNG projects in Australia that are competing for both willing buyers in China, India, South Korea or Japan, and for the limited manpower and materials necessary to build the huge terminals that will make Australia the world’s No. 2 gas exporter behind Qatar.

Chevron put a price tag of A$43 billion ($37 billion) on the first 15 million tonne per year (tpy) phase of the project, some 14% less than costs estimated by the government several months ago, and said the partners would decide within a year whether to add two further production units on Barrow Island, from an initial three, to expand output.

“Gorgon has been a long time coming. Gorgon is destined to be an iconic project, a legacy project with massive investments set in motion today," George Kirkland, Chevron’s executive vice president of global upstream and gas, said at a briefing in Perth.

Chevron reiterated that it will fund its share of the project’s construction from its own balance sheet.

The go-ahead will be a relief to Chevron and partners ExxonMobil and Royal Dutch Shell, each holding a 25% stake in the project, who have endured years of delay amid environmental concerns about its location on Barrow Island, off the coast of western Australia, and rapid cost escalation.

Kirkland said the recent downturn in the oil and gas industry has reduced capital costs, working to their advantage.

It is expected to create about 10,000 jobs at its peak and will be a boost for both the country’s export earnings and a potential boon for project contractors ranging from US firm KBR to South Korea’s Hyundai Heavy Industries and Australia’s Leighton Holdings.

Chevron has already awarded A$2 billion worth of contracts and expects to award a further A$10 billion by year end.

“Gorgon could prompt other projects to speed up to try and fix costs before the next great leap forward caused by rapid expansion and limited resources," said Tony Regan, an LNG consultant with Tri-Zen International in Singapore.

Challenges ahead

The Gorgon gas field, discovered more than 30 years ago, is the first LNG project to be approved since December 2008 and is also Australia’s largest ever resource project, set to generate A$300 billion in Australian export earnings and a government revenue of A$40 billion.

Gorgon is also a breakthrough in terms of being the world’s biggest carbon sequestration project. Chevron will spend A$2 billion to bury 40% of Gorgon’s greenhouse gas emissions, or 3.4 million tonnes per annum, by injecting the gas into a reservoir 2 km below Barrow Island.

Analysts said the greatest challenge for Gorgon partners would be implementing the large-scale carbon capture programme and meeting the government’s stringent environmental conditions, laid down to protect more than 20 endangered animals found on the island, such as the flatback turtle, the spectacled hare-wallaby and the golden bandicoot.

“Carbon capture hasn’t been done on such a large scale and it requires a fairly cutting edge technology, so this could potentially be a risk for the partners," said Leigh Bolton, an analyst at Holmwood Consulting in London.

The greater Gorgon area is estimated to have resources of 40 trillion cubic feet of natural gas, the equivalent of 6.7 billion barrels of oil. The resource contains enough equivalent energy to power a city of 1 million people for 800 years, Chevron said.

More sales to come

Chevron and Shell, which have a combined total of about 5 million tonnes of Gorgon gas left to be sold, said regional demand remained buoyant and they were confident of securing more sales in the coming months.

“We’re confident of demand. Shell’s access to LNG import terminals around the world will give it further options for Gorgon gas," Jon Chadwick, Shell’s executive vice president for Australia, told Reuters in an interview.

Some analysts have warned about the raft of other new LNG projects planned around the region and said the market was unlikely to be able to accommodate all the new capacity, most of which was targeted to come onstream in 2015-2016.

“The previously expected rise in US LNG demand won’t be around anymore because of the surge in domestic gas supplies. So a lot of the gas in the Middle East will have to make its way to Asia, where demand growth for LNG too has its limits," said an analyst who declined to be identified.

Proposed LNG capacity of about 130 million tonnes a year is exceeding 80 million tonnes of uncontracted demand in the Pacific region over the next decade, brokerage firm Bernstein said in a report last month.