U.S. energy behemoth ExxonMobil Corporation (XOM - Analyst Report) will have to bear the brunt of project cost escalation of more than 20% for its huge gas project in Papua New Guinea (PNG). The estimated cost of the project was $15.7 billion, which will now increase significantly to $19.0 billion.
Unfavorable foreign exchange rates contributed $1.4 billion to the cost increase, while land access issues and work stoppage added another $1.2 billion. Undesirable weather conditions also escalated costs by $0.7 billion.
One of the Australian partners in the project, Oil Search, stated that the increase in capital costs would be funded 70% by debt and 30% by equity contributions as disclosed in the terms of the project. However, despite the cost escalation issues, the PNG venture remains on track to start-up and deliver first gas in 2014.
The PNG project is an integrated development that includes gas production and processing facilities, onshore and offshore pipelines and LNG plant facilities with a capacity of 6.6 million tons per year. Despite cost increases, it is expected that the capacity of the plant will increase 5% to 6.9 million tones per year.
It is anticipated that the project will enhance the nation’s GDP by 20%.
Irving, Texas-based ExxonMobil Corporation is the world’s largest publicly traded oil company, engaged in oil and natural gas exploration and production, petroleum products refining and marketing, chemicals manufacture, and other energy-related businesses. The company divides its operations into three segments: Upstream, Downstream, and Chemicals.
ExxonMobil’s strength lies in its balanced operations, strong financial flexibility and continuous improvement on efficiency and cost control. The company’s efforts to build an unconventional resource portfolio both in North America and overseas is aimed at increasing production through increased exposure to large energy resources with long reserve life and low field declines.
However, access to new energy resources has become increasingly difficult. ExxonMobil, like most of its peers, will likely face headwinds to replace its reserves. Given its large base, achieving growth in oil and natural gas production has been a challenge for the company over the last several years.
ExxonMobil, the largest natural gas producer in the U.S., ahead of Chesapeake Energy Corporation (CHK - Analyst Report), carries a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. Longer term, we maintain our Neutral recommendation on the stock.