Gorgon is the name of the sister of Medusa – the monster with snake hair and eyes that can turn man into stone. Representing both powerful and dangerous, the name Gorgon was also used by Chevron for its all-time largest project in Australia.
By far, Chevron has invested $18 billion into this gargantuan project in terms of its 50% stake (Exxon and Shell took 25% stake for each). But this big-bet of Chevron hasn’t provided any profit for its owners yet, and it is only 75% finished up to now. Sounds like a crazy risky plan, but this project is just one among the $120 billion investment plans operated in 2013 by the team made up of Exxon, Shell and Chevron for the purpose of spurring oil production in the future.
So what are the incentives behind such risky mega scale investment actions conducted by those three big international oil companies? It isn’t news that they arrived late to the shale boom in America so they have to watch the new market divided up by small companies. United States hold more than half of the shale oil reserve in the world, so companies lost the biggest opportunity to earn the huge amount of profit.
But there is still chances left in Asia, they seek opportunities in Australia to keep control in advance of the undeveloped shale gas resource. Gorgon is one of the projects in Asia, which is the key to the promise made by Chevron to boost gas production by 20% before 2017.
The next reason is the increasing demand from Asia markets. Japan, China and South Korea are becoming hungrier for natural gas over the last decades, so big oil firms still believe that the energy market is not going to fail on the demand side.
What’s more, oil giants are facing tremendous challenges now that is they have to find the next big gusher to replace their depleted fields. The golden age for companies has passed, the truth now is that they must stake big to bet their future. And if they don’t, then they are going to shrink for sure. Chevron produce less in the past few years, Shell also declines its earning from the $27.2 billion in 2012 to the $16.8 billion in 2013. Investing in the “elephant projects” like Gorgon is their only choice.
But just like the name of Gorgon – powerful and dangerous, big investment are always risky in several aspects. First, exploration of new oil fields are difficult and expansive nowadays: labor cost soars high, competition becomes fiercer and new oil fields’ extraction is more costly. Just like it is indicated in the article Big Oil Companies Struggle to Justify Soaring Project Costs:
The easiest-to-reach oil ran dry long ago, and the most prolific fields often are controlled by state-owned companies in places like Saudi Arabia and Venezuela.
Second, the investment surge will definitely reduce the liquidity of the companies, big projects may be profitable in the long run, but it also worse the current financial statements. Third, the profitability of the investments is still doubtful, from the article Chevron Bets Big on Australian Shale Given Asian Demand, we can read this kind of uncertainty:
The deal poses some risks as the country’s shale resources are very underdeveloped, and it will take years for Chevron to finish with exploration. It is still uncertain whether the gas can be extracted at commercially viable prices.
However, I believe those oil giants are not going to quit despite of those risks above, they would definitely loss the war if they quit right now. Let’s check if they can win on their expensive bets in the future.