As Australian Dollar Gains Strength, Gorgon LNG Project Will Cost Chevron $8 Billion More than Anticipated

This breakwater for the materials offload facility was created to provide shelter for the heavy-lift facility during the construction phase of the Gorgon LNG project. Image: Chevron

CANBERRA–Chevron Corp. (CVX) is unlikely to seek protection against swings in the Australian dollar that have intensified cost pressures at its flagship 43 billion Australian dollar (US$45.3 billion) Gorgon gas project, even as it begins detailed planning for an expansion, Chief Executive John Watson told Dow Jones Newswires Tuesday.

Chevron, the world’s second-largest U.S. oil and gas producer by market value after Exxon Mobil Corp. (XOM), said late last month that it was reviewing the cost of the Gorgon project following a 20% rise in the Australian dollar since construction began in 2009. Around half of the Gorgon project’s costs are in local currency.

Based on the exchange rate between the Australian dollar and the greenback in 2009, the Gorgon project was estimated to cost US$37 billion.

Mr. Watson said the company opted not to hedge foreign-currency risks as Australia’s economy is heavily reliant on the resources sector, so energy prices would rise in step with the Australian dollar, boosting the likely revenues from Gorgon when it comes online in late 2014.

Chevron‘s liquefied natural gas sales contracts from Gorgon are linked to crude-oil prices, which are around 60% higher than in 2009.

“I don’t expect we’ll hedge” foreign currency risks when approving any expansion at Gorgon, Mr. Watson said.

The Gorgon project is the biggest among nearly a dozen terminals under construction or planned along Australia’s coastline that aim to ship LNG to Asian economies including Japan, which is seeking more gas as an alternative fuel for power generation following last year’s Fukushima nuclear crisis.

lng storage tanks gorgon chevron — These LNG storage tanks, currently under construction, will hold 180,000 cubic meters of LNG at -260°F (-162°C) once completed. Image: Chevron

A string of gas discoveries offshore Western Australia state over the past two years has boosted confidence that Chevron can expand the Gorgon project beyond its initial annual output capacity of 15.6 million metric tons of LNG by adding a fourth processing unit.

Mr. Watson said the company is on track to begin early engineering and design work on the possible expansion by the end of the year, and expects to make a formal decision on whether to go ahead with adding roughly 5 million tons of new capacity in 2014.