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Disputes grow amid prospects for slower returns on LNG plants

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Bloomberg are reporting that after spending US$200 billion building the world’s biggest gas export plants, producers in Australia are now locked in legal battles with contractors over who should pay billions of dollars in liabilities resulting from delays and cost blow-outs.

Chevron Corporation, along with Inpex Corporation and Santos Ltd. are among energy heavyweights trying to hold onto funds. The number of disputes is growing weekly in a chain reaction of litigation, which extends to small businesses subcontracted to supply materials and services.

After an investment boom at the start of the decade – poised to catapult Australia ahead of Qatar as the world’s biggest supplier of LNG – many of the world’s top energy producers and service firms face the prospect of weaker returns. Costs of completing eight Australian projects exceeded initial forecasts by US$55 billion amid competition from rival projects for equipment, labour and resources that pushed up prices and led to delays. Now, an oil market slump means companies may have to wait years to get a return on their investments.

The scale of disputes is shown in a 138-page document filed by Santos in the Supreme Court of Queensland in December. Australia’s third-biggest oil and gas producer is suing US contractor Fluor Corporation for AUS$1.5 billion (US$1.1 billion) in damages for work on its US$18.5 billion GLNG facility in the northeastern state.

Inpex’s US$37 billion Ichthys LNG project in Darwin has also been involved in legal proceedings. UGL, owned by Cimic, may enter arbitration with a contractor over alleged delays to the completion of a power plant, according to a regulatory filing by one of its partners in the venture.

The success of legal claims will ultimately dictate the profitability of LNG plants, which have already stretched some of their owners into uncomfortable debt levels.

Some of the blame over the struggle to keep projects on both budget and schedule may lie with poorly defined contracts and changes to the scope of works in the early stages of projects. While feuding between operators and contractors fluctuates through the energy sector’s boom and bust cycles, the slowdown in new LNG developments coming to market has intensified the battle for cash flow.

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