Origin Energy (ASX:ORG)
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5 Years : From May 2011 to May 2016
Origin Energy Ltd. (ORG.AU) and Santos Ltd. (STO.AU) moved to reassure investors Friday that their multibillion dollar Australian gas-export joint ventures remain on schedule and within budget after BG Group PLC (BG.LN) announced a massive cost blowout at a nearby development.
Santos shares slipped 3.4% and Origin stock declined 2% after ondon-listed BG, building a rival liquefied natural gas project at the port of Gladstone in Queensland state, Thursday announced a budget overrun of US$5.4 billion to US$20.4 billion.
With over US$200 billion worth of LNG projects planned, developers face a shortage of skilled labor in Australia that could push up costs. Four of the projects aim to liquefy Queensland's vast onshore coal seam gas reserves for export.
Each project faces its own unique challenges, though, including technical difficulties associated with developing coal seam gas from hundreds of wells under strict environmental conditions.
The cost hike at BG's project, known as QCLNG, has clear read-through implications for rivals, said John Hirjee, an energy analyst at Deutsche Bank. But he notes that unlike BG, Santos and Origin don't have the same currency risks and have signed more fixed-price contracts with third parties.
"Following our Queensland site visit, it is clear to us that QCLNG's upstream acreage is in more sensitive areas, making compliance a greater burden. In addition, we continue to hear well productivity and the pipeline route have added further project specific costs to QCLNG."
BG blamed "local market effects, increased costs of compliance with regulatory processes and some scope changes" in addition to the high Australian dollar for the 36% cost overrun.
Deutsche Bank is assuming capital expenditure at Origin and Santos's projects 15% higher than current company guidance.
Origin said its US$14 billion LNG venture with ConocoPhillips (COP) and China Petrochemical Corp., or Sinopec, remains on track for completion in 2015.
"There has been no change in the cost of the underlying activities for the project, based on currency splits at the time of (the final investment decision)," a spokeswoman said.
A Santos spokesman said its venture with Total SA (TOT), Korea Gas Corp. (036460.SE) and Petroliam Nasional Bhd, or Petronas, remains on schedule for completion in 2015 within its US$16 billion budget.
BG is more exposed to the strong Australian dollar because it's a U.K. company that has to buy Australian dollars to meet local costs, including paying its Australian workforce. Local companies such as Origin and Santos, however, report in Australian dollars and can use the strong currency to buy offshore materials.
Some projects have more reserves on land occupied by cattle farmers while others' are predominantly on crop land, potentially altering community resistance levels. Some reserves also have a higher salt content, pushing up water treatment costs.
Queensland has experienced heavy rain since the projects got underway, and BG delayed construction of the major pipeline connecting its LNG plant to its gas fields after land clearing occurred before environmental checks were completed.
-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; Ross.Kelly@dowjones.com