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Financial Times: BP admits 30% cost overrun on Baku pipeline

BP admits 30% cost overrun on Baku pipelineBy Carola Hoyosand Thomas Catan
Published: April 20 2006 03:00 | Last updated: April 20 2006 03:00

BP has admitted the Baku-Ceyhan oil pipeline project it manages will cost 30 per cent more than the energy group first expected.

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David Woodward, head of BP Azerbaijan, yesterday said the 1,768 km (1,099 mile) pipeline, which is about six months late, would cost $3.9bn (£2.18bn) rather than $2.95bn.

Mr Woodward gave the rising price of contract workers and raw materials as the reasons for the overrun. The figure did not take into account the cost of financing the project and the cost of filling the pipeline with oil, which was now estimated at $600m, he added.

“It doesn't surprise me on a pipeline that is 1,000 miles long or more,” said Bruce Evers, an analyst at Investec Securities in London. “Not only have labour costs gone up, steel prices have gone through the roof.”

It is the first big cost overrun BP has announced since oil prices tripled and everything from the cost of equipment to manpower across the industry surged. Earlier this year, Lord Browne, chief executive, trumpeted the group's ability to minimise the cost inflation afflicting the industry.

The group said yesterday that the increased costs of the pipeline had been known about and that last year the cost estimates had been increased to $3.5bn. BP said the entire cost overrun was already incorporated in the company's capital expenditure budget.

Royal Dutch Shell, BP's Anglo-Dutch competitor, was last year forced to admit an even larger overrun. The cost of its flagship Sakhalin natural gas project off the Siberian coast had doubled from $10bn to $20bn, it said.

BP holds 30.1 per cent of the Baku-Ceyhan pipeline project, which is intended to transport oil to Europe and help it reduce its dependency on Russia.

It operates the pipeline for the rest of the consortium, which includes Socar, Azerbaijan's national oil company, US-based Chevron, ConocoPhillips and Amerada Hess, Statoil of Norway, Italy's Eni, France's Total, Turkey's TPAO, and Japan's Itochu and Inpex.

Separately, BP has sold18 oil and natural gas fields with proved reserves of 27m barrels of liquids and 185bn cubic feet of natural gas to Apache, the US independent oil company, for $1.3bn.

Analysts said the price, driven by the recent surge in oil prices, was fairly high for fields in the shallow waters of the US Gulf of Mexico, the region devastated by hurricanes last summer.

BP shares rose 7½p to 704p.

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