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Chevron’s Gorgon LNG Plant Cost May Fall, Barclays Capital Says




By Angela Macdonald-Smith

Nov. 27 (Bloomberg) — The initial cost of Chevron Corp.’s proposed Gorgon liquefied natural gas project in Australia, currently estimated at about $23 billion, may fall over the next six months as raw-material prices decline, Barclays Capital said.

Such expenses, which will account for at least a fifth of development spending, may be cut in half over the next six months from their recent peaks, analysts led by Paul Cheng said in a Nov. 24 report. That would boost the project’s viability, they said.

The Gorgon venture, which includes Exxon Mobil Corp. and Royal Dutch Shell Plc, has yet to get environmental approval for the delayed project and is also working to improve its profitability after a surge in construction costs. ArcelorMittal, the world’s largest steelmaker, said this month it was doubling cuts in global production as the economic slowdown erodes demand.

“In light of the recent turmoil in the financial market and the collapse in oil prices, we think Gorgon’s project development cost could potentially come in below our current estimate, which in turn should boost the project’s viability in a lower price environment,” Barclays Capital said.

Oil prices have dropped more than 60 percent from their July record and were at $53.36 a barrel in New York at 2:33 p.m. Singapore time. Liquefied natural gas sales contracts are typically linked to crude-oil prices.

At the current cost estimates, the Gorgon venture may need crude oil prices to be between $60 and $65 a barrel in order to generate the minimum acceptable rate of return of 12 percent, the analysts said. At $80-a-barrel oil, the venture could generate a return of 15 percent.

That compares with an estimated rate of return for the North West Shelf venture’s latest LNG expansion of 39 percent at $80 oil, Barclays Capital said. The Woodside-operated venture’s fifth LNG production unit in Western Australia generates the minimum 12 percent return at oil prices as low as $20 a barrel, it said.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at[email protected]

Last Updated: November 27, 2008 02:01 EST

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