Exxon Warns of a $3.3 Billion Spike at its PNG Gas Project

on Nov 12, 2012
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On 12 November 2012, Reuters reported that Exxon Mobil Corp (NYSE:XOM), the world’s largest listed oil company, said that it was facing a $3.3 billion (£2.6 billion) spike in costs at its liquefied natural gas (LNG) project in Papua New Guinea, with the jump in costs blamed largely on unfavourable foreign exchange rates.

**Exxon’s LNG Project in Papua New Guinea to Report Cost Overruns**
The Texas-based oil producer said that the estimated cost for the PNG LNG project has increased by more than 20 percent, from $15.7 billion to $19 billion, with the jump in cost due to unfavourable foreign exchange rates and delays caused by disgruntled workers and landowners.
Reuters reports that the PNG LNG project, which includes gas production and processing facilities, onshore and offshore pipelines, and liquefaction facilities, is Papua New Guinea’s biggest-ever natural resource development project, with the potential to lift the nation’s GDP by 20 percent. The project, a joint venture between Exxon and several partners including the ASX-listed companies Santos (ASX:STO) and Oil Search (ASX:OSH), is expected to produce 6.6 million tonnes of LNG per year once completed.

The Financial Times quotes Oil Search’s managing director Peter Botten as saying that the jump in estimated final costs for the LNG project was “disappointing” and was at the “upper end of what might have been expected.” Santos, however, noted that it had ample liquidity to fund its higher share. “With over $6 billion in cash and undrawn debt facilities, Santos is in a strong position to fund all of its capital programs,” pointed out the company’s CEO Andrew Seaton, as quoted by Reuters.

**Foreign Exchange Impact**
!m[Forex Fluctuations The Largest Single Contributor To The Jump In Costs ](/uploads/story/769/thumbs/pic1_inline.png)In a press release, Exxon Mobil noted that foreign exchange was the largest single contributor to the increase. The FT reports that in 2011, Exxon had to raise the cost estimates for the project by $700 million because of adverse foreign currency movements, with forex adding $2.1 billion in increased costs in total. According to local press reports, the US oil producer has not put hedging contracts in place because of its project financing agreements.

In its PNG LNG press release, Exxon also noted that delays from work stoppages, extraordinary logistics as well as weather challenges also contributed to the increase in costs.
Reuters reports that Exxon’s PNG gas project is not the only one to be plagued by increasing costs, with LNG plants notorious for running overbudget and falling behind schedule. “International groups partnering with Australian companies into these projects are starting to feel the high cost environment,” notes Peter Esho, chief Market analyst at City Index Group Sydney, as quoted by Reuters.

**First LNG Delivery on Track for 2014**
Despite the increase in costs, PNG LNG’s chief executive Decie Autin said that the project economics had benefitted from a five percent increase in plant capacity, and a 30 percent rise in LNG prices since 2009. In addition, the project is said to be on schedule for start-up and delivery of first LNG cargo in 2014. “The Project team was able to overcome significant delays and still maintain overall schedule through re-sequencing work under unique and very challenging circumstances,” noted Mr Autin in the press release.
The FT reports that Santos fell 2.2 percent in Sidney, whereas Oil Search shares declined by 3.4 percent.

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