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THE WALL STREET JOURNAL: Chevron Gas Project Underscores Development Woes

By PATRICK BARTA and RUSSELL GOLD
June 7, 2006; Page A10

A surprise decision by Australian environmental regulators to try to block Chevron Corp.’s huge Gorgon natural gas project highlights how even the most reliable gas-producing nations may not be able to deliver new supplies as quickly as expected — a development that could drive up gas prices in the years ahead.

Western Australia state’s Environmental Protection Authority said it had rejected the proposed $8 billion offshore liquefied-natural-gas, or LNG, project on the grounds that Chevron and its partners couldn’t satisfactorily mitigate some of its environmental risks. The agency cited concerns including potential damage to flatback turtle nesting areas near the proposed LNG processing plant Chevron and its partners plan to build on an island off Australia’s west coast.

The EPA decision doesn’t necessarily stop Gorgon and governmental officials in Western Australia can overrule it. The premier of Western Australia said yesterday that he remains a supporter of the project, Reuters reported, and Chevron officials have said they intend to appeal the EPA’s recommendation.
 
Even so, the EPA recommendation is a setback for Chevron that could add costs and delays at a time when Gorgon and other major projects around the world face rapidly rising equipment, labor and other development expenses. Such barrier could slow development of major new sources of oil and gas despite high global demand and strong world-wide prices. Gorgon has already suffered delays and some analysts have questioned whether it can be brought online at a reasonable cost.

Gorgon is due to come online early next decade as many gas buyers are running out of supply options. Asia has relied heavily on Indonesia for its LNG — which is chilled into a liquid form that is transported by specially built tankers — but major supplier Indonesia has been struggling to meet its contractual commitments.

The environmental decision raises questions about whether Gorgon and other nearby LNG projects will have smooth sailing. Frank Harris, an LNG specialist at energy consultancy Wood Mackenzie in Scotland, said that if other projects get delayed, it’s likely the LNG market will remain tight well into the next decade.

The project is central to Chevron’s strategy of boosting its presence as a leading gas supplier in Asia. Gorgon would be Chevron’s largest capital investment and one of the biggest new gas projects in the world, with an estimated 40 trillion cubic feet or more of gas.

“Gorgon is a large and complex project, but we’re confident that we can manage those challenges and end up with something that’s going to be valuable to the joint venture [partners] and to Australia,” said Colin Beckett, general manager of the Greater Gorgon area for Chevron.

But others saw the decision, and potential for additional delays, as symptomatic of Chevron’s struggle to deliver this key project on time and on budget.

Chevron owns 50% of the project. Its partners Exxon Mobil Corp. and Royal Dutch Shell PLC each own 25%.

Write to Patrick Barta at [email protected] and Russell Gold at [email protected]

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