Ichthys hit by another cost blow out

Friday, 14 December, 2018 - 15:19

The cost of building the Ichthys LNG project has blown out again, with French group Total saying it has increased by $US5 billion to $US45 billion, but project operator Inpex is disputing the extent of the increase.

Japanese company Inpex said the capital expenditure required for the start-up of production had increased by “several per cent” due to factors including a delay in start-up.

It said the $US45 billion figure put out today by project partner Total also covered the post-production start-up period, extending one year or more, and was therefore based on a largely different interpretation of capital cost.

Total also announced today it had sold a 4 per cent stake in Ichthys to Inpex.

The sale, for $US1.6 billion, reduced Total’s interest to 26 per cent while Inpex now holds a 66.2 per cent stake.

Total’s president, exploration & production Arnaud Breuillac said the French group remained committed to the project despite the cost increase and schedule delays.

“Ichthys is part of a wave of Australian LNG projects, which have unfortunately experienced major cost overruns and delays during their construction phase,” he said.

“The final capex estimate provided by the operator is around $US45 billion to be compared to an updated figure around $US40 billion in 2017.

“In line with our capital discipline policy, we have therefore decided to control our capital employed in Ichthys by monetizing a 4 per cent stake after the project start-up and de-risking.”

Ichthys was originally estimated to cost $US34 billion when the development was approved in 2012.

The reasons for the cost increases and schedule delays have not been disclosed.

However, the project has been marred by contractual disputes, most notably involving Laing O’Rourke and CIMIC subsidiaries UGL and CPB Contractors.

Further contractual disputes were revealed in October by US engineering giant KBR, which teamed up with Japan's JGC and Chiyoda to form the JKC joint venture , which was the EPC contractor responsible for building Ichthys.

KBR revealed it has a $US950 million claim against Inpex for changes to the project - implying the JKC joint venture has a claim totalling about $US3 billion.

The delays and cost increases on the project have had some beneficiaries, including Perth-based contractor Monadelphous. In the year to June 2018, its engineering construction division enjoyed a 54 per cent jump in revenue to $950 million, with Ichthys being its largest project.

The cost blowout at Ichthys follows big cost increases on several other Australian projects, most notably Chevron’s Gorgon and Wheatstone developments.

However, Australia is not alone in this regard, with several big projects under way in the US, including Cameron LNG, Freeport LNG and the Calpine gas power project all hit by cost increases and schedule delays.

This has hit the earnings of some major engineering contractors, including Chiyoda (which has flagged a big loss for the year to March 2019) and US group McDermott International (which was close to break-even in the September quarter).

Recent earnings updates from Chiyoda and McDermott have cited an esacalation of labour costs, a severe shortage of skilled labour, high labour turnover and lower than expected productivity as contributors to the project problems in the US.

They have also cited a surge in shale gas developments due to rising oil prices.

The Ichthys project involves the extraction of gas off the Kimberley coast and piping it to a newly built LNG plant near Darwin, which was officially opened last month.

The liquefied gas is then exported in tankers to international markets, primarily in Japan.

Total noted today that the two LNG processing trains at Ichthys are fully operational and expected to produce 8.9 million tonnes per year.

The first LNG cargo was exported on October 22 this year.

Chevron’s Gorgon LNG project, built on Barrow Island off the Pilbara coast, is still ranked as Australia’s most expensive resources development.

Its final cost was $US54 billion, about $US17 billion more than when it was approved in 2009.

However, with expected LNG output of 15.6mt per year, Gorgon is substantially cheaper per tonne than Ichthys.

Chevron’s Wheatstone LNG project, built near Onslow on the Pilbara coast, also suffered cost blowouts.

The final bill was $US34 billion, an increase of $US5 billion.

The problems at Gorgon were attributed to poor weather, which delayed the movement of materials to Barrow Island, and labour productivity issues.

The main issue at Wheatstone was poor performance at one of the overseas fabrication yards making modules for the LNG plant and an underestimation of the amount of materials required to complete the work.