Big Oil Struggles To Justify Soaring Project Costs; Puts The Bakken Into Perspective; The Red Queen?

The Wall Street Journal is reporting, on-line front page:

Chevron Corp., Exxon Mobil Corp., and Royal Dutch Shell spent more than $120 billion in 2013 to boost their oil and gas output—about the same cost in today's dollars as putting a man on the moon.

But the three oil giants have little to show for all their big spending. Oil and gas production are down despite combined capital expenses of a half-trillion dollars in the past five years.

One of the biggest problems: Costs are soaring for many of the new "megaprojects" to tap petroleum deposits needed to replenish depleting fields. Plans under way to pump oil using man-made islands in the Caspian Sea could cost a consortium that includes Exxon and Shell $40 billion, up from the original budget of $10 billion. The price tag for a natural-gas project in Australia, called Gorgon and jointly owned by the three companies, has ballooned 45% to $54 billion.

Exxon is borrowing more, dipping into its cash pile and buying back fewer shares to help the Irving, Texas, company cover capital costs. Exxon has said such costs would hit about $41 billion last year, up 51% from $27.1 billion in 2009.

As they pursued the big-bet strategy, the three oil giants arrived late to the shale boom in North America, where they missed out on profits raked in by smaller, nimbler companies that pioneered how to extract oil and gas from the dense rock.

Exxon and Chevron are pressing ahead with their megaprojects, confident they will boost production within three years.

By 2017, Exxon will pump a million new barrels of oil per day and the equivalent in natural gas, showing the company's ability to deliver big projects on time, executives say. Exxon's output started to rebound in late 2013 after a two-year decline, helped by new crude from a $13 billion oil-sands project in Canada. The project's cost rose $2 billion since 2011 because of regulatory hurdles and permit delays.

Oil-industry experts say it will be difficult for the oil giants to spend less because they need to replenish the oil and gas they are pumping—and must keep up with rivals in the world-wide exploration race.

Chevron has been especially aggressive, promising a 25% increase in oil and gas output by 2017. Last year, the San Ramon, CA, company poured $42 billion into oil and gas projects, more than double its 2010 total, even though Chevron is half as big as Exxon or Shell by annual revenue. Chevron plans to spend an additional $40 billion in 2014.

The spending surge has drawn attention from U.S. securities regulators, who have demanded more disclosure from Chevron about whether the jump will get even bigger and affect the company's liquidity. Chevron told regulators it will provide more details.

Chevron's most gargantuan projects, from Australia to the Gulf of Mexico, haven't generated any cash flow yet—and might not until next year. The lag between the upfront investment in the projects and their output is pressuring Chevron's bottom line.

Analysts expect the company to report that profits fell about 20% to $21 billion in 2013 from $26.2 billion in 2012.

The Gorgon natural-gas project is one of the most extreme examples of the runaway costs that haunt Chevron, Exxon and Shell. The three companies teamed up in 2009 to build the plant on an island reserve 40 miles off Australia's coast, aiming to tap a natural-gas trove estimated at 40 trillion cubic feet. Gorgon could be productive for decades and feed energy-hungry Japan, South Korea and China. Chevron staked more than $18 billion of its own money on Gorgon, one of the company's biggest projects ever, owns nearly half of the project and runs it. Exxon and Shell own a 25% stake each.