Chevron to move away from big, expensive projects to cut costs
For seven years, Chevron Corp. has poured billions of dollars into a pair of new liquefied natural gas plants in Australia, struggling through years-long delays and huge cost overruns, only to bring them online during the worst oil bust in decades.
An anticipated surge of Asian demand for super-cooled gas hasn’t materialized, rival LNG companies have crowded the market, and the collapse of crude oil means LNG revenue will come in much lower than Chevron and others expected when crude oil fetched $100 per barrel.
What’s more, Chevron faced myriad environmental challenges, high labor costs and technical hang-ups, and its Gorgon and Wheatstone LNG plants in Australia are expected to run $20 billion over budget.
Oil and gas companies have been blindsided by a severe oil downturn, several years after entering multi-decade LNG sales contracts that pegged liquefied natural gas to the price of oil.
If companies had that foresight, they probably wouldn’t have locked themselves into those types of agreements,” said Gautam Sudhakar, an analyst and director of global LNG at research firm IHS in Washington, D.C. “Even if you have a few years of low oil prices, it really does impact the overall profitability and rates of returns of these projects.
Pound for pound, Chevron, the No. 2 U.S. oil company, has outspent its rivals on long-term projects that take years to generate any cash.
The company on Tuesday acknowledged that it has seen design errors on a number of projects and inconsistent results from its long-term projects but said it is taking steps to correct the problem, requiring greater insight into engineering plans before it signs off on new projects.
“We plan to take a more selective approach to these investments, funding only those with the most attractive economics,” said Jay Johnson, senior vice president of upstream.