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Logistics and Lizards Disrupt Chevron’s Project Off Australia

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Screen Shot 2015-07-04 at 13.26.18Chevron agreed to share the cost with Exxon Mobil, Shell and three Japanese power companies, Osaka Gas, Tokyo Gas and Chubu Electric Power. “This is probably the last of the megaprojects for the oil companies for a while…”

By A. ODYSSEUS PATRICK: JULY 3, 2015

SYDNEY, Australia — Getting anything to Chevron’s gas-processing plant on Barrow Island is a bit of a trick.

Some supplies travel 15 hours from Perth to a supply base for shipping. En route, trucks cannot stop under trees, to avoid picking up bugs and bird droppings. When people and cargo finally make it to the island, an army of 300 enforces a quarantine: Every Velcro strap on clothing and bags is checked for seed pods, boots are scrubbed free of dirt and pants with cuffs never even make it ashore.

Such measures are intended to protect the island’s unique wildlife. But these and other logistical issues have also piled complexity and cost onto the gas facility, called Gorgon.

The original $37 billion price tag has ballooned to $54 billion. It is an especially big cost to swallow while energy prices have slumped.

While companies cannot easily pull back from projects already underway, oil giants are unlikely to approve any new ambitious plans anytime soon. “This is probably the last of the megaprojects for the oil companies for a while,” said Brian M. Youngberg, an analyst at Edward Jones.

When Gorgon was approved in 2009, the plant was meant to convert two natural gas fields into liquefied fuel for Asia’s energy-hungry economies. Mega projects were common with the industry on the upswing. That summer, the $5 price per one million British thermal units in Japan and South Korea was among the highest in the world and rising.

Today, the industry is more challenging. Liquefied natural gas prices in Japan have fallen 60 percent since February 2014, when they hit $20. The current price is about half what Chevron needs for the facility to make money, according to the brokerage firm Sanford C. Bernstein & Company.

Neil Beveridge, an analyst at Bernstein, said Gorgon had the highest cost relative to its output of any liquefied natural gas project being built. He estimates that Gorgon needs to sell fuel for about $14 per million British thermal units to be profitable over the life of the plant. The price in May in Japan was $7.90.

“At current prices, Gorgon will fail to recover its cost of capital,” Mr. Beveridge said.

Chevron executives say they are confident about Gorgon’s financial prospects. In a conference call, the chief executive, John S. Watson, told analysts and investors that he expected the project to do “just fine” over 30 to 40 years, and be “nicely profitable” even with low gas prices.

A Chevron spokesman said Gorgon’s prospects should not be judged by short-term changes in energy prices. “After all, over the last 30 years the price of oil has dropped 50 percent five times,” Kent Robertson said in an email. “Decisions to advance a project like Gorgon are based on long-term financial prospects.”

The company estimates world demand for gas will grow by the equivalent of one Gorgon-sized project every year for the next 10 years.

Other companies building liquefied natural gas projects in the region are getting caught in the industry downdraft. In the Australian state of Queensland, on the other side of the country from Gorgon, three big gas projects by eight companies, including Conoco Phillips, are about $8 billion over budget.

“We are seeing a pause, definitely,” said Martin Wilkes, a natural gas specialist at RISC Advisory, an independent energy consulting firm in Perth. “People are cutting capital budgets. They are taking stock and asking, ‘Do these projects stack up?’ You are seeing that in Australia, and places like Africa and Canada.”

Chevron knew Gorgon would be expensive. To justify the high construction cost, the company decided to build an usually large plant on Barrow, about 37 miles offshore of the state of Western Australia. Three giant refrigeration units would produce 2.1 billion cubic feet of natural gas a day — more than double the average daily consumption of every house and apartment in New York State. The gas would then be ready for relatively short sea trips to Japan, China, India and South Korea.

Australia’s skilled work force, strong legal system and pro-development investment policies made the country attractive. Chevron agreed to share the cost with Exxon Mobil, Shell and three Japanese power companies, Osaka Gas, Tokyo Gas and Chubu Electric Power.

Still, the challenges were immense. Chevron would need to assemble one of the world’s bigger liquefied natural gas plants on an island in a cyclone zone. Barrow has no permanent work force and is 900 miles from its main supply base. Getting the gas to the plant from the seafloor would require more than 80 miles of flexible pipes.

On top of that, the island is full of wildlife that had not encountered natural predators in 8,000 years. It has been a nature reserve since 1910 and is populated with rare animals including giant lizards, turtles, bandicoots and the spectacled-hare wallaby, a small, kangaroolike marsupial.

Facing opposition from environmentalists, Chevron agreed to what it says is the largest quarantine system ever enacted by a private company. Harry Butler, one of Australia’s best-known environmentalists, is a consultant for Chevron and helped it formulate strict rules to stop foreign plants and animals from reaching the island.

About 55,000 shipping containers have been screened so far. Seventy microphones around the island listen for Asian house geckos that may have sneaked in. And contract drivers transporting goods must follow stringent procedures, including stopping only at approved sites for toilet breaks, according to a former Chevron consultant who spoke on the condition of anonymity because of a confidentiality agreement with the company.

“It drove a lot of the suppliers crazy because of the rigorous regime to supply Chevron,” the former consultant said. “It annoyed a lot of Chevron people too because of the cost.”

Dr. Butler, 85, was last on Barrow Island six months ago, in the hot Australian summer. He said the costs of protecting the island were insignificant compared with the benefits of protecting the island’s wildlife. But he does not pretend the island is a paradise.

“It’s never been an attractive place,” he said in a phone interview from Perth. “It’s a desert island. There’s not much soil.”

From the outset, some experts were concerned that America’s second-biggest energy company was making a mistake. Mr. Wilkes, the RISC Advisory consultant, said his company had predicted that Barrow Island would be a poor location because Australia’s tight environmental laws would make the plant prohibitively expensive.

“Chevron and its partners have learned that decisions made early can come back to haunt you,” he said.

With 6,000 workers crammed in and around the island waiting for equipment to be delivered, it did not take long for Gorgon to become a logistical nightmare. Congestion kept some ships from unloading for up to 35 days at a cost of $400,000 to $500,000 a day, according to a study of the project by Bradon Ellem, a Sydney University employment relations professor, that was paid for by the International Transport Workers’ Federation.

When Chevron ran out of room to house workers on Barrow Island, it rented a cruise liner for about $80 million from Estonia. Serving as a floating hotel, it overlooked the island.

Company executives have acknowledged they underestimated the complexity of getting equipment and components to Barrow.

“What we found is that it was just much more difficult to get what we would call the tonnage and the volume of material up to the island to feed the work force so they could be productive,” Chevron Australia’s managing director, Roy Krzywosinski, told an Australian legislative committee 18 months ago. Chevron would not make Mr. Watson available for an interview and said Mr. Krzywosinski did not give media interviews.

The first gas could flow into the plant from under the sea “any day,” a Chevron executive, Jay Johnson, said in March.

A version of this article appears in print on July 4, 2015, on page B1 of the New York edition with the headline: Tricky Logistics and Rare Lizards Trip Up Chevron.

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