Game changes for Chevron at Gorgon

Some of the Gorgon gas project’s major backers are warily eyeing prices as the project nears production.

It is costing $US54 billion ($A77bn) to build, but the real issue with the giant Gorgon gas project in the state’s north-west is that it is almost certainly worth a lot less in the current depressed market for oil and gas – perhaps as much as $30 billion less.

Valuing Gorgon is an exercise its owners will undertake next year, after the first shipment of liquefied natural gas  (an essential step to prove that the project works as promised).

But soon after shipments of LNG start, a detailed analysis of what went wrong at Western Australia’s biggest resource development, including an assessment of who’s to blame for the spectacular cost blowout and completion delay, will be launched

US oil major Chevron, with a 47.3 per cent stake in Gorgon, is the company most closely associated with the project, which will extract gas from fields to the west of Barrow Island and convert it to exportable LNG in three production trains (processing units) on the island.

Other big shareholders in Gorgon are ExxonMobil (25 per cent), Royal Dutch Shell (25 per cent) and three Japanese energy utilities (Osaka Gas, Tokyo Gas and Chubu Electric Power), each with small stake.

Shell’s involvement is important for an exercise in valuing Gorgon because last week it swung an axe through several of its higher-cost (and higher risk) assets, to report its first quarterly loss in 16 years – a thumping $US7.4 billion.

Assets written down thanks to the impact of lower oil and gas prices included an exploration project in Alaska, a tar sands project in Canada, and shale-gas projects in the north-eastern states of the US.

Shell’s hardline approach to asset values are likely to flow into other assets under pressure from excessively high construction costs and low commodity prices, with that 25 per cent stake in Gorgon a prime candidate for a write-down – unless oil and gas prices recover quickly.

Chevron chief executive John Watson has hinted that Gorgon is close to the top of his clean-up list, with job shedding likely to start soon as the project approaches the end of its construction phase.

“One of the key areas for reductions is in Australia,” Mr Watson said when announcing Chevron’s 64 per cent fall in profit for the September quarter, to $US2 billion.

Job losses at Chevron are expected to total between 6,000 and 7,000, which equates to around 11 per cent of a worldwide workforce of 64,700.

The company’s WA operations are likely to be hit hard by the cuts as Chevron hunts for cost savings.

A hint of what’s likely to happen came with last month’s decision by Chevron to delay for at least two years the building of a new office at Elizabeth Quay.

Plans for a luxurious new riverside address for its WA management team has obviously been badly received at the company’s head office in California.

Cost cutting will only be a start at Chevron. Revaluing Gorgon will be step two, along with a close look at the company’s other new LNG project in WA – the $40.6 billion Wheatstone LNG project near Onslow. It also has the potential to knock a hole in Chevron’s balance sheet.

The obvious problem with both Gorgon and Wheatstone is that the decisions to invest were taken in a different era, back when oil and gas prices were rising and future profits looked assured.

As recently as four years ago, even the Western world’s oil watchdog, the International Energy Agency, hailed what it called ‘the golden age of gas’, a time when demand and prices would rise strongly.

LNG delivered into Asia as recently as two years ago was fetching around $US16 per million British thermal units. Today, the price is down close to 60 per cent at around $US6.50/mbtu.

At that peak LNG price, Gorgon might have been able to justify its $77 billion price tag; but at the latest price there are doubts about whether the project will actually be profitable.

Along the with crash in oil and gas prices, another problem with Gorgon is the cost blowout suffered during construction, with the original budget set in 2009 at $US37 billion and first LNG shipments scheduled for 2014.

Being two years late means Gorgon has missed an opportunity to cash in on peak oil and gas prices, while the 45 per cent cost increase means that it needs higher prices more than ever.

Why it cost so much more to build than planned, and has taken so much longer, will almost certainly be blamed on the resources boom that forced all prices higher, along with a rise in the value of the Australian dollar during that period.

However another factor Chevron might address is the decision to locate the gas processing facilities on Barrow Island, a location that required expensive transport of construction materials while strict environmental protection rules added to the complexity.

For an extra 70 kilometres of submarine pipeline, Gorgon gas could have been landed at Cape Preston, site of Sino Iron’s equally ill-fated iron ore processing venture. Additionally, Onslow, which is the site of the Wheatstone LNG project is just 100km from Barrow Island.

Like all great blunders, Gorgon is not the result of a single mistake; it is composite of bad decisions that start with the choice of Barrow Island and include failure to control costs and failure to stick to a timetable.

The first result of those missteps was seen in the Perth office deferral and will soon involve local job losses, followed by heavy-duty asset value write-downs by the project partners, which are required by accounting rules to determine a current value of all their assets.

Gorgon today is quite obviously not worth $US54 billion, and it might not even be worth its original budget of $US37 billion.

Tax and houses

FALLING Perth residential property prices are good news for buyers and bad news for owners, but a possible increase in the GST could reverse those positions.

A building boom was launched in 2000 as buyers and home builders rushed to beat the July 1 2000 GST starting date.

If, in the months ahead, the GST is raised by 5 per cent to 15 per cent, it will added around $15,000 to the cost of a $300,000 house, almost certainly enough to trigger a rush by cost conscious buyers with a similar effect on the price of existing homes.