Santos LNG project cost blows out to $18.5 billion

Wed Jun 27, 2012 11:19pm EDT
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By Rebekah Kebede

PERTH (Reuters) - Santos (STO.AX: Quote) hiked the cost of its Gladstone LNG project on Thursday by 15 percent to $18.5 billion, saying it needs to find more gas ahead of a planned 2015 start-up, adding to evidence about the challenges facing Australia's coal seam gas industry.

Santos is the second of three coal seam gas-to-liquefied natural gas (CSG to LNG) projects to announce a big cost increase, and the news knocked its shares down 4.5 percent, even though a cost hike was widely expected.

Energy firms kicked off $50 billion of CSG to LNG projects in Australia less than two years ago, but industry experts have raised concerns that plans are running off track due to rising costs, skills shortages, patchy drilling results, regulatory hurdles and potential competition from cheap U.S. gas.

"My take is that they are short of gas and the rumors have been flying thick and fast for a year that these plants are going to be short of gas," said Peter Strachan, an analyst with Stock Analysis.

The announcement would likely be good news for smaller gas producers in the region who may be able to sell gas into Santos' project, he added.

Santos's cost blowout follows an announcement earlier this year by BG Group BG.L that its rival Queensland Curtis Island LNG project would face a 36 percent cost increase to $20.4 billion, citing regulatory costs, some changes to the project, and a stronger Australian dollar.

Analysts expect a third project, Origin Energy's (ORG.AX: Quote) Australia Pacific LNG (APLNG) to face cost increases to its development as well.

Santos said on Thursday the extra $2.5 billion for Gladstone in spending had been slated for after 2015 but was being brought forward in order to drill 300 extra wells before the end of 2015.   Continued...