Gorgon Project Blows Out Again

The massive WA Gorgon Project has once again disappointed Chevron with a recent warning that Australia’s biggest LNG and resources project would blow out to at least $US54 billion.

This is the second time the Gorgon LNG project costs have increased.

Chevron also pushed back the initial gas delivery target to mid 2015. Initial hopes were the production targets would be met at the start of 2015, allowing the much anticipated LNG to start earning revenue for Chevron.

Gorgon Project blows out to at least $US54 billion

At the start of the project the Gorgon estimate was around $US37 billion, this was in 2009 when Chevron and key partners Royal Dutch Shell and Exxonmobil made their final investment decision. After a troubled construction phase, a year ago the budget was� revised to $US54 billion – severe miscalculation of $17 billion dollars.

Multi-billion dollar projects of this nature have a habit of blowing out the budget, yet no one seems to come up with the answers as to why the amounts differ so much. However, Gorgon’s costs have been reportedly impacted by currency fluctuations, the challenges of the logistical geographic location stemming from operating on the Barrow Island A-grade nature reserve, and much lower than expected ‘human’ productivity.

15.6 million tonnes of LNG a year

Construction of the three-train LNG project, which will be able to produce 15.6 million tonnes of LNG a year, is about 75 per cent completed.

Chevron vice chairman George Kirkland said this morning, despite the recent extra $2 billion dollar budget uplift, “Gorgon project economics are attractive and we continue to make steady progress against key project milestones.”

The Gorgon cost blowout was confirmed as part of Chevron’s capital budget outlook for 2014.

The US company indicated its worldwide CAPEX investment budget for 2014 would be around $US39.8 billion, $US2 billion lower than 2013.

However, Chevron said 2014 would represent top of the tree spending on its two flagship WA LNG projects, the Gorgon and the $US29 billion Wheatstone development. The Wheatstone project, which will process Carnarvon Basin gas at an 8.9mtpa LNG plant near Onslow, is 25 per cent complete.

Chevron has fought hard to contain Gorgon costs and has been “value engineering” to try to keep a cap on the mega-project’s budget.

Definition of ‘Value Engineering’

Value Engineering can be best described as a systematic approach to provide the necessary functions on a project at the lowest cost. It centres around the substitution of materials and methods with less expensive alternatives, predominantly in the expressed hope sacrificing functionality. It is focused solely on the functions of various components and materials, rather than their physical attributes.

Earlier this year independent studies estimated the Gorgon project could come in at to $US59 billion, and that Chevron had demanded a re-engineering of the forecast.

The Pilbara LNG developments are two of Chevron’s most important future cash flow and assets and will contribute the equivalent of 400,000 barrels a day of oil a day to its total operational output.

The Gorgon Project & WA Jobs