Santos LNG project cost blows out to $18.5 billion

PERTH (Reuters) - Santos hiked the cost of its Gladstone LNG project on Thursday by 15 percent to $18.5 billion, saying it needs to find more gas ahead of a planned 2015 start-up, adding to evidence about the challenges facing Australia's coal seam gas industry.

Santos is the second of three coal seam gas-to-liquefied natural gas (CSG to LNG) projects to announce a big cost increase, and the news knocked its shares down 4.5 percent, even though a cost hike was widely expected.

Energy firms kicked off $50 billion of CSG to LNG projects in Australia less than two years ago, but industry experts have raised concerns that plans are running off track due to rising costs, skills shortages, patchy drilling results, regulatory hurdles and potential competition from cheap U.S. gas.

"My take is that they are short of gas and the rumors have been flying thick and fast for a year that these plants are going to be short of gas," said Peter Strachan, an analyst with Stock Analysis.

The announcement would likely be good news for smaller gas producers in the region who may be able to sell gas into Santos' project, he added.

Santos's cost blowout follows an announcement earlier this year by BG Group that its rival Queensland Curtis Island LNG project would face a 36 percent cost increase to $20.4 billion, citing regulatory costs, some changes to the project, and a stronger Australian dollar.

Analysts expect a third project, Origin Energy's Australia Pacific LNG (APLNG) to face cost increases to its development as well.

Santos said on Thursday the extra $2.5 billion for Gladstone in spending had been slated for after 2015 but was being brought forward in order to drill 300 extra wells before the end of 2015.

"It's important to stress that this additional capex is not a result of a significant cost overrun or any major scope changes in the project. Our life of project cost assumptions are consistent with what we had at our final investment decision," Santos Chief Executive David Knox told reporters by phone.

Knox said about 10 percent of the cost increase was due to a combination of cost and scope changes in the project, with 90 percent of the cost increase a result of pushing parts of the project development forward.

Santos said it would be able to fund its $750 million share of the extra spending and had no need or plan to raise additional debt or equity for Gladstone LNG or any other of its approved projects.

It reaffirmed it expects to spend A$3.75 billion ($3.78 billion) in capital in 2012.

The Gladstone LNG project is 30 percent owned by Santos. Malaysia's Petronas and France's Total each own 27.5 percent and Korea Gas Corp <036460.KS> owns 15 percent.

Developers of Australia's new gas export projects are under pressure to deliver, having sold most of the gas from the first phase of the three coal seam projects to Asian customers through long-term deals starting around 2015.

All three projects have consistently held they are on schedule to export gas between 2014 and 2015. ($1 = 0.9929 Australian dollars)

(Additional reporting by Sonali Paul; Editing by Richard Pullin)

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