Yahoo Finance Santos' Gladstone LNG faces additional well costs
* Gladstone LNG sustaining capex uncertain
* Train 1 on schedule, train 2 seen online end 2015
* GLNG to ramp up to fully contracted level by 2017 earliest
By Rebekah Kebede
PERTH, Dec 4 (Reuters) - Santos Ltd, Australia's No. 2 energy company, could face more than $1 billion in additional costs to drill enough wells to bring its $18.5 billion Gladstone liquefied natural gas (LNG) export plant up to full capacity.
The project is part of a $190 billion surge in new LNG capacity development under way in Australia, but costs have already blown out by around 16 percent from an original estimate of $16 billion.
Santos told an investor briefing on Wednesday it would have to drill about 300 wells in two years to 2015, and another 200 to 300 wells a year thereafter to source enough coal seam gas to fuel the plant, which is due to come on stream in 2015.
While well costs have fallen in the past three years, if drilling costs remain the same, the drilling programme would lead to additional capital expenditure for Gladstone of $1.2 to $1.6 billion through 2018, according to Reuters calculations.
"While the $18.5 billion number hasn't changed ... we're going to have 200 to 300 wells with ongoing costs probably being in the order of $400 to $500 million a year," said Johan Hedstrom, an analyst with Canaccord Genuity Australia in Sydney.
This would be in sharp contrast with offshore projects such as the North West Shelf in Western Australia which had ongoing capital costs of about $10 to $20 million a year, Hedstrom said.
Gladstone LNG is one of three coal seam gas to LNG export projects on Australia's eastern seaboard, with BG Group bringing its Queensland Curtis Island LNG plant online in 2014 and Origin and ConocoPhillips' Australia Pacific LNG bringing a plant online in 2015.
Unlike offshore LNG projects, which rely on a few large reservoirs, coal seam gas projects have to source gas from thousands of wells spread over a large area and the market has been closely watching the projects following a series of cost blowouts.
Santos executives said the cost of getting the company's flagship project fully up and running would depend on the number and cost of wells, as well as the availability of gas from third parties.
Current costs per well have fallen 30 percent from 2010 levels to $1.35 million, and the cost could change over time.
"The average cost (per well) is a difficult one to tie down and this really will be a year by year proposition," said Trevor Brown, a vice president at Santos in Queensland.
Santos said Gladstone LNG was on schedule to deliver its first cargo of LNG in 2015, but may take until late 2017 or 2018 to ramp up to its fully contracted capacity of 7.2 million tonnes per year.
It expected capital expenditure of A$4 billion in 2013, falling to A$3.5 billion in 2014.
Santos owns 30 percent of the project, while Malaysia's Petronas and Total own 27.5 percent each. GLNG has binding offtake agreements with both Petronas and South Korea's KOGAS for 3.5 mtpa over 20 years.
Santos also said its 2013 production would come in around 51 million barrels of oil equivalent (mmboe), slightly below its earlier forecast, but output would rise to 52-57 mmboe in 2014 as the massive PNG LNG project with Exxon Mobil in Papua New Guinea comes onstream in the second half.
