Arrow LNG is one of four on Australia's east coast that aim to pump gas from coal seams to export facilities. The estimated investment for all the projects is rising rapidly from the initial price tag of around $70 billion.

The investment estimate for Arrow has already risen 30-40 percent, the source told Reuters, due to the rising price of labor and the cost of meeting stringent environmental regulations. Without some change in the regulations, developers would struggle to move ahead with the project, the source added.

"So far the cost has risen 30-40 percent. Now it is expected to rise by up to 50 percent," said the source, who was not authorized to speak to the media and spoke on condition of anonymity.

"The project is facing delay. It has hit a deadlock," the source said. "It is really hard ... to move ahead with the project if the government keeps its policies unchanged."

The source said Arrow Energy initially estimated in 2010 that the project would cost a total of $24-$26 billion, but that had now gone up to around $34-$36 billion.

Shell had previously indicated costs for its most recent project, Prelude, would be around $3 billion to $3.5 billion per million metric tons of LNG per year. If costs for Arrow LNG are in that range, it would cost $24 to 28 billion.

The planned LNG export terminal would have the capacity to ship 8 million metric tons (8.8 million tons) per year and is scheduled to start up in 2017.

An Arrow spokesman said it would take a decision on whether to proceed with the project in late 2013.

"Arrow has never shared or published project cost forecasts and hence does not recognize the figures reported," an Arrow spokesman said in an emailed statement.

"It is recognized industry wide that there are cost pressures on all projects. Despite this, Arrow is on track to make a (final investment decision) in late 2013."

The company is expecting to issue a tender for the project's front-end engineering and design (FEED) phase and about to enter FEED for two major pipelines, the spokesman said.

The source said the cost of developing the gas production from the coal seams has almost doubled from an original estimate.

Originally, the upstream development costs were estimated to account for half of the total cost of the overall project, which also includes gas liquefaction plants, but now the proportion was set to be much higher, the source said.

PUBLIC OPPOSITION IN AUSTRALIA

A groundswell of public opposition to coal seam gas developments due to concerns about their impact on groundwater supplies has made it one of Australia's most closely regulated industries, and the costs of complying with environmental regulations are likely to drive up costs, industry experts say.

The gas from the coal seams would be pumped to a facility that will chill it for export as liquefied natural gas (LNG).

The source said that sharing of LNG facilities was one way to cap costs, but the main cost pressure of the project was coming from coal seam gas production.

Shell Chief Financial Officer Simon Henry said last week that it was in talks on sharing planned LNG facilities with rivals in Queensland, Australia.

The operator of another of the four projects announced over $5 billion of cost overruns on Thursday. BG Group (BG.L) said a 36 percent rise in the estimated cost of its Queensland Curtis Island LNG project was in part due to the cost of regulatory compliance, bumping up the total to $20.4 billion from $15 billion.

Macquarie Research estimates that the other two projects, operated by Santos (STO.AX) and Origin Energy (ORG.AX), both face 15 percent cost overruns.

(Reporting by Charlie Zhu in HONG KONG and Rebekah Kebede in PERTH; Editing by Ed Davies)

• A Permanent Economic Emergency