Origin Energy Ltd (ASX: ORG) and its partners faces the prospect of having to kick in more funds to complete its Australia-Pacific LNG project at Gladstone, Queensland.
Today Origin reported that the project was 84% complete, but 91% of the budget had already been spent. The project is on track for first production in mid-2015. APLNG is currently expected to cost $24.7 billion, but the project partners have already spent $22.5 billion, with cost blowouts on areas of the project not operated by Origin.
Origin is the operator of the upstream assets, including drilling for gas, gathering and piping the gas to the LNG Plant, which is operated by ConocoPhillips. The two companies hold a 37.5% share in the project, with Chinese company Sinopec holding the remaining 25%. Sinopec has also contracted to take 7.6 million tonnes of LNG per annum for 20 years.
And while the project may have cost billions, Origin says it expects to see distributable cash flow of around US$1 billion on average each year, once the LNG plant is in production.
The project was originally estimated to cost US$20 billion, but costs blowouts have seen it rise a further US$4.7 billion, and it's likely to rise further. The question is how much will Origin have to kick in, or will ConocoPhillips bear the brunt of the additional costs?
Origin is not alone in seeing its LNG project costs blowout. Santos Limited (ASX: STO) has faced the same issues at its smaller Gladstone LNG project, which is now estimated to cost US$18.5 billion, having risen from initial estimates of US$16 billion.
Woodside Petroleum Ltd's (ASDX: WPL) Pluto LNG project cost $3 billion more than expected, eventually costing the company and its partners $15 billion.
Origin may also face higher sustaining costs, given it is tasked with supplying the gas for the APLNG project. That involves drilling thousands of wells, many of which are coal seam gas. The company expects operated wells to cost around $3 million each in the next few years, but costs could rise over time.
At this stage I prefer Santos as an oil and gas play, given its involvement in 3 separate LNG projects, plus its other diversified oil and gas assets.
