Production costs for all commodity producers are blowing out (from high energy and materials costs) and do significantly eat into profits generated from higher commodity prices. That is why it is safer to play the actual commodity markets. While everyone is ignoring this fact though I am not going to argue with the mob mentality. But the piper is coming to equities market without an ounze of doubt!
-------------------------------------------------------------- BassGas cost blowout confirmed Nigel Wilson, Energy writer July 06, 2006 ORIGIN Energy confirmed yesterday that the cost of the BassGas project had blown out to $750 million, compared with a budget of $450 million. But the company and its partners "remain confident" of recovering the cost overruns from the project's original contractor, Clough, through arbitration, while heading off a counter-claim for more than $100million.
Origin is the operator of BassGas, which plans to commercialise gas and liquids from the Yolla field in Bass Strait.
It told the stock exchange yesterday that sales of gas and liquids had begun, and commissioning of most of the facilities was completed.
"The plant is now being prepared to ramp-up production and sales as the final commissioning of the project through to performance testing continues," Origin said. Yesterday's announcement was the first time the full extent of BassGas's cost overruns have been formally revealed.
The project was scheduled to come into production in June 2004 but at that time Clough and Origin had an acrimonious public spat about the readiness of the project to receive gas.
Clough later claimed it had finished the project to the requirements of its $400 million turnkey contract, and argued difficulties had arisen in part because Origin failed to include measures to exclude mercury from the gas stream in the construction contract.
Origin said yesterday that when it entered the project in April 2003 "there was uncertainty regarding the level of some impurities in the gas from the Yolla field. The initial design of the plant allowed for modification should later testing of gas from the Yolla field reveal that further treatment was required".
Origin said these modifications added about $25 million to the joint venture's project costs.
Since Origin took over management of the project from Clough in December 2004 "a rigorous design and rectification program has been pursued to bring the BassGas project to first gas production".
Origin said that as a result of the extensive rectification program, and the construction effort required, "the cost of the project has increased by a further $275 million to approximately $750 million".
The actual cost to the BassGas joint venture would be clear when the arbitration process was completed, which was unlikely before the end of 2007.
The BassGas joint venturers are Origin with 42.5 per cent, Australian Worldwide Exploration (30 per cent), the Warren Buffett affiliate CalEnergy (15 per cent) and Mitsui offshoot Wandoo Petroleum (12.5 per cent).
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