By Ross Kelly
SYDNEY--Santos Ltd. (STO.AU) has increased the cost of its
Australian gas-export joint venture by US$2.5 billion, highlighting
the challenges facing companies attempting to prepare
unconventional gas for export.
News of the cost blowout to US$18.5 billion comes as producers
utilize new drilling technology to tap onshore gas trapped in shale
rocks or coal seams. Four projects in Queensland state plan to
build massive gas-export terminals at the port of Gladstone fed
with coal seam gas, an unconventional fuel trapped in coal seams
buried hundreds of meters below the Earth's surface.
The gas will be piped to the coast and chilled for export to
Asian utilities at liquefied natural gas, or LNG, processing
plants. Companies in the U.S. are also exploring the potential to
chill some of the country's vast shale gas reserves for export amid
a slump in domestic U.S. gas prices.
Coal seam gas, or CSG, has never been prepared for export before
on a large scale and Santos and joint venture partners Total SA
(TOT), Petronas and Korea Gas Corp. (036460.SE) have various
technical and logistical challenges to overcome before shipping
their first cargo in 2015.
A rival CSG project in Queensland operated by BG Group PLC
(BG.LN) this year reported a much larger US$5.4 billion cost
blowout to US$20.4 billion. It pinned much of the increase on the
strength of the Australian dollar, which hurts offshore companies
like the British group more than local players such as Santos.
Big resources projects in Australia also face labor shortages,
which can push up employment costs and cause delays.
Although Santos's project isn't immune from these challenges,
the budget increase at Gladstone wasn't about significant overruns
or changes to work requirements, Santos Chief Executive David Knox
said.
"The key challenge facing the CSG-to-LNG projects is upstream
field deliverability in the early stages of project ramp-up," Knox
said in a statement.
Conventional LNG projects are typically supported by just a few
offshore natural gas wells, whereas thousands of onshore wells are
required to support the Santos joint venture and the three others
CSG-to-LNG projects planned for Gladstone.
Santos said it has been forced to bring forward US$2.5 billion
of spending that was originally expected to be incurred after first
LNG in 2015 in order to get its gas wells up to speed.
The two other ventures planning to build LNG projects fed with
coal CSG at Gladstone include one between ConocoPhillips (COP),
Origin Energy Ltd. (ORG.AU) and China Petrochemical Corp., known as
Sinopec.
The fourth venture, between Royal Dutch Shell PLC (RDSB) and
PetroChina Co. (PTR) is the only one that hasn't yet made a final
investment decision.
The increase at the Santos venture shouldn't come as a big
surprise. Deutsche Bank for example was assuming spending at
Santos' project and the rival Origin and Conoco venture 15% higher
than original guidance. Still, Santos shares slid 3.8% in early
trade in Sydney, underperforming a 0.6% rise in the wider
market.
-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692;
Ross.Kelly@dowjones.com