One of the biggest, most expensive liquefied natural gas projects in history may have developed a physical crack — and the managing company isn't answering questions from investors.
They may have reason to worry. The crack, which is believed to be in a floating production storage and offloading (FPSO) unit, could add billions of dollars in upfront costs, and it could delay the project even further, likely costing more down the line as a major competitor plans to swoop in.
The floating unit is sitting at a yard in Busan, South Korea, and is set to eventually operate at "Ichthys" — a giant gas and condensate field offshore western Australia led by Japan's Inpex, with a 30 percent stake from France's Total. That project first broke ground in 2012 and is set to be a mega-scale operation that produces about 8.9 million tons of LNG every year if it reaches full capacity.
A project delayed
Inpex said earlier this month that the unit would "soon" sail away to Australia, and the Japanese operator said the unit is undergoing "last-minute preparation work" including commissioning, cleaning and certification work.
One person familiar with the project, however, told CNBC that they have firsthand knowledge of an unannounced crack in the equipment, which was driving up costs and delaying the unit's journey to Australia, previously expected for 2015. An additional three sources said they had been told there was a crack, but could not independently confirm the defect.
When CNBC reached out to the company and asked whether the rumored crack is real, Inpex said it "cannot provide details concerning reasons for the delay."
According to one person familiar with the matter, Inpex recently hired as many as 300 welders to fix the damage. Several sources said they believe the damage is the main reason for the delay.
Overruns: from $20 billion to more than $37 billion
The alleged fault is in the unit's "turret," a central part of an FPSO that conveys "almost everything that will enter or leave" the unit, including chemical injection lines and power cables, Ichthys LNG Project Offshore Director Claude Cahuzac said in comments available on Inpex's website.
A fault in a big piece of liquid natural gas equipment isn't so abnormal, industry analysts told CNBC, with one suggesting LNG projects generally require "lots of trials and errors." What is less common, they said, is the amount of investor concern being generated by the Ichthys project.
Naturally enough, that concern comes down to money. The original budget of the project back in 2008 was around $20 billion. Inpex's estimate now stands at $37 billion plus an additional amount of spending, Mizuho Securities said following an analyst briefing in May this year.
In fact, one portfolio manager who reviewed the recent spending projections by Inpex said that "with the 2018 capital expenditure guidance increasing by around 50 percent over the last six months, it may suggest Inpex has lost control over costs."
In November 2016, the company's capital expenditure forecast for 2018 was $3.75 billion. Six months later, however, the company's forecast was $5.4 billion at current dollar-yen exchange rates. With $1.65 billion added to the spending forecast in a matter of six months, some are now estimating the investment in the project could break $40 billion.
Expedition climbs buildings, struggles for glimpse
Another thing on investors' minds: Any additional cost blowouts could hit Inpex's credit rating. Moody's wrote in a May 29 report, "Given the large size of the project, a significant further delay or cost overrun would pressure Inpex's credit rating in the next 12 months."
As rumors of a major crack began to brew, a team of investors and an analyst tried to carry out on-site reconnaissance themselves, according to multiple sources.
The team climbed to the top of tall buildings near the site in an attempt to get a better view, one member of the group told CNBC, because they couldn't access the construction yard — let alone get more information on the crack from Inpex. But the unit was blocked from view, the team member said.
Although doubts about the unit are now creeping through the investment community, the project still holds much promise. Energy consultancy Wood Mackenzie called the project a "game changer" for Inpex, writing in a recent note that "once up and running, it will bring Inpex into the elite LNG club of global LNG operators, dominated by the major international oil companies"
To be a member of that club, however, Inpex may have to race to the field and start drilling quickly.
Another large-scale LNG project is coming right next door to the Ichthys field. Royal Dutch Shell's Prelude floating LNG production facility was towed from South Korea to waters near Australia late last month. Analyst Saul Kavonic from Wood Mackenzie added in his note that, "whichever project starts up first will end up taking some of the neighboring gas and producing more gas overall. So it's a case of 'whoever sucks first will suck most.'"
Inpex says it currently has more than 70 projects in more than 20 countries. That makes it Japan's largest oil and gas exploration and production company.