"The cost increase stems from design changes to meet operability requirements," Caltex managing director Dave Reeves said.

"This has led to increased labour and materials costs at a time of high demand worldwide for engineering, fabrication and construction labour and materials."

Caltex's Kurnell refinery has started construction of its Clean Fuels Project, an upgrade that will see the refinery produce some of the cleanest fuels in Australia and the world, according to Caltex.

The project will upgrade the refinery to greatly reduce the benzene content of petrol and sulphur content of diesel.

Reeves said Caltex would still comply with the Australian government's 1 January, 2006, deadline for the sale of cleaner petrol and diesel.

He also said Caltex would be able to absorb the unexpected cost increase.

"Over the last three years, Caltex has significantly improved its capital structure and financial flexibility by reducing debt, achieving our stated target of $400 (million) to $500 million by end-2004," he said.

Caltex's previously announced gearing target of 20 to 25% remained appropriate and its dividend policy was unaffected, according to Reeves.

Caltex’s annual general meeting for shareholders is being held today at the Sydney Town Hall.