Converting natural gas to liquefied natural gas (LNG) is very expensive and getting more so. Chevron Corp. (NYSE: CVX) last night said that its Gorgon LNG project offshore of Western Australian would now cost $52 billion, up more than 40% from the original cost estimate of $37 billion. Last month Exxon Mobil Corp. (NYSE: XOM) raised its cost estimate for its LNG project in Papua New Guinea by about 20%, to $9.9 billion.
Chevron, like Exxon, attributed the cost increase to higher labor costs, delays and currency exchange rates. In Chevron’s case, the currency impact is responsible for about a third of the cost increase.
Even at the new price increase, Chevron executives say Gorgon is a good deal:
Gorgon project economics are attractive. While investment requirements have grown, oil prices, which directly impact the overall revenue stream, have increased by approximately 80 percent over the same time period. In addition, the LNG nameplate capacity has increased by 4 percent to 15.6 million tons per year.
That’s about 21.5 billion cubic feet a year of export capacity, once the plant begins deliveries in the first quarter of 2015. At today’s price of around $16 to $18 per thousand cubic feet for deliveries to big consumers like Japan and Korea, the Gorgon project represents a substantial new revenue stream for Chevron and its partners.
Chevron’s shares are up about 0.8% this morning, at $105.99 in a 52-week range of $95.73 to $118.53.