Australia's LNG projects face major delays, benefiting US producers

SINGAPORE (Reuters) -- Australia's plans for a huge increase in its production of liquefied natural gas are being dealt a big blow by a series of production delays, as energy companies struggle with technical problems and cost overruns.

The country is still likely to become the world's biggest LNG exporter, dispatching about 85 MMtpy by the end of the decade, up from 30.7 MMt in 2015 and 45.1 MMt last year. But the pace of growth is much slower than expected because of snafus and higher-than-expected costs that have delayed plans to start or increase LNG exports from four megaprojects, Gorgon, Ichthys, Prelude and Wheatstone, all along or off the coast of northwest Australia.

Now at least three of them, Shell's Prelude floating LNG production vessel, Inpex's Ichtys project, and the expansion of Chevron's Gorgon operation, won't begin exporting until 2018 or even later, rather than 2017 as previously planned, according to several sources with knowledge of the matter.

Chevron, Shell, and Inpex would not comment on potential delays.

It should all be a boon for other suppliers of LNG to Asian buyers, such as utilities in the region. These suppliers can also benefit from higher prices.

Traders said that the beneficiaries include US-based Cheniere Energy with its facility at Sabine Pass in the Gulf of Mexico, and global energy giant ExxonMobil with its production in Papua New Guinea.

Making matters even worse, the producers in Australia are having to go to their rivals to fulfil contracts.

"The Australian producers have supply commitments, so when there's production delays they have to buy these supplies from competitors in the spot market," said an LNG trader involved in such deals who was speaking on condition of anonymity.

"These guys will make a lot of money filling the gap of Australia's production delays," he said.


Once completed the four projects will have a combined annual LNG capacity of 36.5 MMt. The development costs will total $130 billion.

Each one has had to hit the brakes. "All of Australia's recent wave of LNG projects have had cost and schedule overruns compared to expectations," said Saul Kavonic of energy consultancy Wood Mackenzie.

The projects being built in Australia are amongst the biggest and technically most challenging ever attempted in the industry. One problem the LNG project developers have pointed to in explaining production delays is that they struggle to find enough qualified and experienced staff.

"There aren't many experts and teams with relevant experience who can lead such huge developments. That's contributed to some of the delays," said on engineer who has worked on developing offshore oil and gas projects.

At the $35 billion Ichthys project, engineering firm CIMIC this week pulled out of its contract to build the facility's power station, citing cost overruns.

Ichthys, which includes a stationary rig and a floating production vessel, was due to start operations between July and September this year, but the power station problem will almost certainly cause more delays and costs.

"Any delays to the delivery of the project may have very serious implications for Inpex. Low oil prices have already impacted the financial position of the company," said Tom O'Sullivan, managing director of energy consultancy Mathyos Japan.

At Gorgon, which has cost $55 billion to develop and which started operations last year, there are problems in bringing expanded production online.

Two sources with knowledge of the matter said that crews working on the expansion phase had to be shifted to repair operational facilities, delaying full completion.

Chevron said it would not comment on daily operations.

Delays are also expected at Shell's Prelude. The production vessel, the world's biggest ship at half-a-kilometer in length, is currently being built in South Korea.

Scheduled to generate cash flow by 2018, one source with the shipyard and another with one of Prelude's LNG buyers said it was unlikely that Prelude would produce any gas before late 2018, maybe even 2019.

Potential delays and cost overruns are likely to have a big impact on returns on investment.

"On average, Australia's recent LNG projects were forecast to achieve an internal rate of return (IRR) of around 13%," Wood Mackenzie's Kavonic said. "They are now only forecast to realize below 8%,"

Neil Beveridge, oil and gas analyst at AB Bernstein in Hong Kong, said that "the returns of many of the projects are going to be low and probably lower than the cost of capital in the current oil price environment."


Beyond adding to already huge costs for its developers, the delays will have a strong market impact.

For 2017, they mean a tighter market than initially expected, and prices have already reacted. The Asian spot LNG price almost doubled between June last year and January 2017 to more than $9 per MMBtu, its highest since 2014.

The delays are happening just as new supplies are coming on stream elsewhere. Seven US export projects are currently approved, with a potential to reach 50 MMt a year by the early 2020s.

"Australian LNG projects will be competing with US projects. Cost efficiency is going to be critical. And here, the Australians have to put in some serious effort," Kavonic said.

Reporting by Henning Gloystein; Additional reporting by Aaron Sheldrick in TOKYO, Jim Regan in SYDNEY and Mark Tay in SINGAPORE; Editing by Martin Howell


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