Chevron's Costly LNG Project to Start in Shadow of Oil Crash
(Bloomberg) -- After years of delays, cost overruns and labor unrest, Chevron Corp.’s Gorgon project, one of the world’s most expensive liquefied natural gas ventures, faces another challenge: the weakest energy prices in more than a decade.
As Chevron prepares to start exports from the development off northwest Australia, oil prices -- which traditionally determine the value of LNG shipments -- are languishing near 12- year lows. The project will add to a wave of new supply, including the first deliveries from the U.S., amid weakening demand.
Gorgon highlights the challenge of investing in major energy projects amid unpredictable and volatile prices. Brent crude has more than halved since Chevron decided to go ahead with the development in 2009, and its cost has ballooned to $54 billion from $37 billion. While the company says it’s focused on returns over four decades, current market conditions will reduce near-term cash flows.
“Falling oil and LNG prices will greatly affect the economics of all new projects coming online now,” James Taverner, a Tokyo-based analyst at industry consulting firm IHS Inc., wrote in an e-mail. “Gorgon is one of the most expensive LNG projects in the world. Low LNG prices will hurt its margins.”
Chevron, which signed a preliminary supply agreement earlier this week to sell Gorgon gas to a buyer in China, is concentrating on the long term. The San Ramon, California-based company has agreements in place with buyers covering more than 80 percent of its LNG from the Gorgon and Wheatstone ventures in Australia, it said in an e-mail.
“Legacy assets such as Gorgon will drive long-term growth and create significant shareholder value for decades to come,” Chevron said. “Gorgon will generate substantial earnings over its expected economic life of 40+ years.”
Today, however, the market is reeling.
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