(EnergyAsia, November 20 2012, Tuesday) — Esso Highlands Limited, a subsidiary of the US major, has informed its consortium partners that it has raised the cost of their liquefied natural gas (LNG) project in Papua New Guinea by more than 21% to US$19 billion.

Esso Highlands, which is leading the PNG LNG consortium to build the project to export LNG to Asia, attributed the sharp rise in costs to the weaker US dollar, domestic labour problems and shortages, on-going disputes with landowners and rising material costs.

While the project is 70% completed and remains on schedule to start producing gas in 2014, Esso Highlands, a 33.2% stakeholder, also increased its annual production capacity by 5% to 6.9 million tons.

“Foreign exchange is the largest single contributor of the increase and to a lesser extent, delays from work stoppages due to community disruptions and land access led to increased construction and drilling costs. Extraordinary logistics and weather challenges also increased costs. In particular, rainfall exceeded historic norms for most of the last two years,” said Esso Highlands.

The US dollar has fallen from a high of 2.2 Papua New Guinean kina in 2010 to around 2 today. Against the Australian dollar, the dominant currency in the southern Pacific Asian region, the greenback has fallen from 0.95 to $1.05 over the past year.

Esso Highlands’ partners are Oil Search Limited (29%), the PNG government’s Independent Public Business Corporation (16.6%), Santos Limited (13.5%), Nippon Oil Exploration (4.7%), PNG landowners’ Mineral Resources Development Company (2.8%) and Petromin PNG Holdings Limited (0.2%).

The PNG project includes the development of gas reserves in PNG’s Southern Highlands and Western Provinces to be delivered through 700km of pipeline to liquefaction and storage facilities located northwest of Port Moresby. Over its 30-year life, PNG LNG is expected to produce over nine trillion cubic feet of gas.

Putting the best spin on the shock announcement, Decie Autin, PNG LNG project executive, said:

“ExxonMobil successfully operates world-class projects around the world in a broad range of technical, operational and financial conditions. The project team was able to overcome significant delays and still maintain overall schedule through re-sequencing work under unique and very challenging circumstances.

“Despite the cost increase, project economics are helped by the 5% increase in plant capacity and approximately 30% increase in commodity pricing since project funding in 2009.”

But its partners are clearly worried, with shares of Australian partners Oil Search and Santos both taking an immediate hit when news of the cost overrun was released.

Describing the cost increase as “considerably beyond the upper end” of its expectations Oil Search said it would fully review the revised estimates while seeking to work with the operator “to mitigate these estimated cost increases.

While stating it is well positioned to manage the impact of a strong Australian dollar on project capital costs, Santos said its share of the revised budget will increase by US$450 million to over US$2.11 billion.

Despite its need for foreign investment to lift the bulk of its seven million people from poverty, Papua New Guinea has earned a reputation as being one of the most hostile places in Asia for businesses.

Five years ago, Exxon Mobil abandoned a long-drawn attempt to build a pipeline to deliver natural gas from PNG to Australia after failing to tame the twin issues of rising cost and land disputes.