Exclusive: Shell, PetroChina JV Australia LNG faces big cost overrun

Fri May 4, 2012 3:34am EDT
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By Charlie Zhu and Rebekah Kebede

HONG KONG/PERTH (Reuters) - The cost of Royal Dutch Shell (RDSa.L: Quote) and PetroChina's 0857.K Australian joint venture LNG may rise as much as 50 percent from initial estimates, which could force the companies to delay development, a source close to the project said on Friday.

Arrow LNG is one of four on Australia's east coast that aim to pump gas from coal seams to export facilities. The estimated investment for all the projects is rising rapidly from the initial price tag of around $70 billion.

The investment estimate for Arrow has already risen 30-40 percent, the source told Reuters, due to the rising price of labor and the cost of meeting stringent environmental regulations. Without some change in the regulations, developers would struggle to move ahead with the project, the source added.

"So far the cost has risen 30-40 percent. Now it is expected to rise by up to 50 percent," said the source, who was not authorized to speak to the media and spoke on condition of anonymity.

"The project is facing delay. It has hit a deadlock," the source said. "It is really hard ... to move ahead with the project if the government keeps its policies unchanged."

The source said Arrow Energy initially estimated in 2010 that the project would cost a total of $24-$26 billion, but that had now gone up to around $34-$36 billion.

Shell had previously indicated costs for its most recent project, Prelude, would be around $3 billion to $3.5 billion per million metric tons of LNG per year. If costs for Arrow LNG are in that range, it would cost $24 to 28 billion.

The planned LNG export terminal would have the capacity to ship 8 million metric tons (8.8 million tons) per year and is scheduled to start up in 2017.   Continued...

A Shell sign is seen at a petrol station in Melbourne. REUTERS/Mick Tsikas