“The Wheatstone Project is a legacy, value-creating investment that will provide Chevron with significant reserves and production growth” declared Chevron chairman and chief executive officer John Watson when announcing that Chevron’s Australian subsidiary will proceed with the construction of its $US29 billion Wheatstone Project in Western Australia.
The project, involving exploration in the offshore Wheatstone and Iago fields off the coast of Western Australia and subsequent transportation of gas and liquid to an onshore processing facility, is the second biggest ever resources project undertaken in Australia. Following on from approvals of other multi-billion dollar projects this year, including Santos’s GLNG in Queensland, Shell’s Prelude LNG floating project and the Australia Pacific LNG Project, its go-ahead is testament to the underlying strength of the mining construction sector in Australia.
Still, not all developments of late have been happy affairs. In June, Woodside was forced to push back the schedule of its Pluto Liquefied Natural Gas project in Western Australia and to raise its estimate of capital expenditure for the project by $900 million to $14.9 billion. In that same month, BHP Billiton suffered a $US1.3 billion cost blowout and nine month delay for its Worsley alumina refinery expansion, also in Western Australia. That’s not to mention ongoing problems with the Oakajee Port and Rail Project, where estimated costs have ballooned from $4.4 billion to almost $6 billion ($5.94 billion) and the future of the project remains uncertain.
Indeed, since 2004, according to a report in The Australian last July, only one $2bn-plus resources project in Australia – the $3bn Darwin LNG plant of ConocoPhillips – has been brought in on time and on budget.
To be sure, in Chevron’s case, the company seems confident of avoiding cost blowouts for Wheatstone. Part of the reason for this, according to recent media reports, is that around 80% of the capital spend will be underpinned by existing market tenders rather than mere cost estimates.
Moreover, despite the recent spate of cost blowouts, resource companies are confident their investments will pay off. Woodside, whose Pluto project is underpinned by fifteen year sales contracts, still refers to the development as an ‘attractive project’ which will provide ‘significant value’ to Woodside shareholders. For Wheatstone, Chevron’s confidence in the project is underpinned by pre-existing contractual arrangements for the sale of around 80% of planned gas production.
Still, with so many large scale projects coming online, that some will exceed their estimated cost of construction seems inevitable.
For one thing, the technical challenges and complexity associated with these types of projects increases the chance that something will go wrong. Indeed, project complexity, along with inflation and exchange rates, was cited by BHP as the primary reason behind delays and cost blowouts at Worsley
Then, there are labour concerns, which Chevron acknowledges is an issue for Wheatstone. When construction peaks, Chevron says Wheatstone will employ 6,500 people. Australia Pacific will need 6,000 workers throughout the life of the project. Santos will need 5,000 for its GNG Project. As these projects come online, workers with the right skills will be scarce and costly.
(As it stands, there is already a moderate shortage of building and engineering professionals in Australia, according to the latest Clarius Skills Index.)
Exchange rates are unpredictable too, and can further exasperate any cost blowouts if they move the wrong way.
And then there are unforeseen events. Seven weeks of Woodside’s delay with Pluto were attributable to weather, the company says.
The surge in approvals of mining projects in the tens of billions of dollars this year is an enormous boost to Australia’s civil construction sector.
But with this boost comes the challenge of delivering on time and within budget.