Here’s What Asia’s Booming Energy Demand Has Done to Chevron’s Budget
Chevron’s (NYSE:CVX) ballooning costs throw the pressures the energy company is facing into sharp relief.
Compared to its rivals, Chevron’s expected 2013 budget is massive; Marathon Oil (NYSE:MRO) has set a $5.2 billion capital budget for 2013 and ConocoPhillips (NYSE:COP) plans to invest $15.8 billion in the next year. But Chevron will make investments totaling $36.7 billion in 2013, a figure that represents 12 percent of its total budget for the year. Of that amount, more than 90 percent of the funds will go towards upstream crude oil and natural gas exploration and production, while 7 percent will be allocated for downstream operations.
The company is facing such a bloated budget because of recent changes in the global economy. In the spotlight is Chevron’s Gorgon liquid natural gas project in Western Australia, the biggest natural resource project in that country. There, costs are spiraling out of control due to the rising cost of labor.
Two factors are contributing to the problems. Energy companies have spent more than $160 billion to develop their operations in Australia, which has made labor a premium. The country’s large natural-gas reserves, its stable government, and nearness to the rapidly-growing economies of Asia has set Australia on a course to surpass Qatar as the world’s largest exporter of liquefied natural gas…
The nature of Australia’s demographic and geographic makeup has driven up labor costs as well. Because its population of about 23 million people is comparatively small — it is approximately one-tenth the size of the United States — the country does not have a deep labor pool for projects like Chevron’s Gorgon, and so high salaries are necessary to attract workers.
Projects, from drilling operations in ocean waters off the country’s northern coast to exploration enterprises in the Outback, give workers an average of $163,600 per year, a salary 25 percent higher than what workers in the U.S. are paid, according to The Wall Street Journal.
As a result Chevron, BG Group (BRGYY.PK), and Exxon Mobil (NYSE:XOM) have experienced a series of budget overruns. For Chevron, the cost of the Gorgon project has reached $52 billion, an increase of 40.5 percent from the 2009 estimate of $37 billion.