Sequencing is the key word that kept everyone interested in Shell in the 1990s, and it’s shaping as the same in the first years of the 21st century.
In particular, it’s all about how a big oil company can achieve the delicate balancing act of bringing on different projects, which produce the same fuel, and please their partners, and the governments which authorise what they want to do, at the same time.
If this is all a little abstract, let’s talk turkey – or turtles, if that’s your preference since the Gorgon project is a key component.
Back in the 90s, Shell had a problem with its many potential liquefied natural gas prospects, mainly along Australia’s west coast, and elsewhere in the Asia Pacific region.
It tried to fix this dilemma by launching takeover bids for Woodside Petroleum, but failed to clear “national interest” hurdles erected by the government.
A series of disasters followed. Shell was caught out by US regulators on the small matter of “booking” oil and gas in the ground as reserves, before the resources were really reserves.
Then it decided to walk away in annoyance from its Australian plans, and pour a massive amount of capital into a Russian LNG project on Sakhalin Island.
Oops, and double oops.
An attempt to sequence LNG projects which suited Shell’s agenda, but not that of Australian governments, or partners in the various projects, saw the big Anglo-Dutch oil company march into the arms of the Russian bear.
It is history that the bear said “come into my cave”, and proceeded to strip Shell of some ownership rights, and future revenue. Why? Because in Vladimir Putin’s Russia the government does what it believes it can get away with doing.
Now for today’s re-run of the great sequencing debate of the 1990s: the challenge confronting ExxonMobil. It’s a somewhat fanciful suggestion but what is likely to be overheard is identical to what was said in Shell’s boardroom, only in American accents.
Look at what confronts ExxonMobil as it struggles with the question of which LNG project is best: a minority stake in Gorgon in waters off the Western Australian coast, or operatorship of an onshore Papua New Guinea development.
Given that one must go before the other, the word sequencing comes into play.
At Gorgon, about which so much has been written that we’re all thoroughly tired of it, Chevron Corporation says it is getting closer by the day to a development decision. That’s nice, but the speed at which it is approaching that decision would make a snail blush.
At the PNG project, according to a recent report by the stockbroking firm, JP Morgan, it’s a much brighter outlook because the gas is onshore, there’s plenty of it, and the government and partners are “aligned” – unlike Gorgon where Chevron and ExxonMobil are said to be “unaligned” on cost and profitability.
Astute readers will see where The Slug, masquerading as a fly on the wall, is heading, and that is the immensely amusing parallel situation facing ExxonMobil today with what confronted Shell in the 1990s.
There are rival potential projects requiring an investment decision. One has an apparently cooperative government, the other a difficult one. One has onshore gas, the other has deepwater gas. One has “aligned” partners, the other has a keen operator but an unenthusiastic minority partner.
If ExxonMobil tells Chevron it can’t agree on Gorgon just yet because it can see a better “sequence” of opportunities elsewhere, The Slug would not be surprised, but he would predict the same fate that befell Shell on Sakhalin awaits ExxonMobil in PNG.
Quite simply, it’s far better to stick with regulatory certainty than chase what seems to be a higher profit margin elsewhere – when that elsewhere is the modern day equivalent of the wild west where the gun rules.
