Exxon's PNG LNG project costs balloon to $19 billion

Mon Nov 12, 2012 2:30am EST
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SYDNEY (Reuters) - Exxon Mobil (XOM.N: Quote) said it faces a $3.3 billion spike in costs at its LNG project in Papua New Guinea, the latest Asia-Pacific project to be hit by cost overruns as competition is set to grow from new gas supplies coming on tap in North America and Africa.

The more than 20 percent jump in costs to $19 billion was blamed on unfavorable foreign exchange rates and delays caused by disgruntled workers and landowners, and comes after costs to develop liquefied natural gas (LNG) projects in neighboring Australia to supply the Asian market have also shot up.

Exxon told its partners in a letter published on Monday the project remained on schedule for start-up and delivery of gas in 2014 and forecast production capacity had been increased by 5 percent to 6.9 million tons per year.

The PNG LNG project is the impoverished nation's biggest-ever resources development and could lift GDP by 20 percent.

Papua New Guinea has struggled to attract foreign investment to exploit its abundant natural resources due to corruption and unclear regulations.

Shares in the two Australian partners in the project, Oil Search (OSH.AX: Quote) and Santos (STO.AX: Quote), tumbled 5.2 percent and 2.4 percent, respectively.

"International groups partnering with Australian companies into these projects are starting to feel the high cost environment," Peter Esho, chief Market analyst at City Index Group Sydney, said in a note.

LNG plants are notorious for running overbudget and missing schedules. In Australia, three out of seven projects under construction have announced hikes of an average of over 20 percent, while a fourth is conducting a cost and schedule review.

Developments in Australia have primarily faced cost jumps due to increased labor costs, a high Australian dollar, and stiff competition for resources.   Continued...

An Exxon gas station is pictured in Arlington, Virginia January 31, 2012. REUTERS/Jason Reed