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| Chevron Has Second Thoughts on British Project | Chevron Has Second Thoughts on British Project |
| (about 17 hours later) | |
| LONDON — The American oil giant Chevron said Friday that it was putting its flagship British deepwater development project under review, saying high costs might not make it viable to continue. | LONDON — The American oil giant Chevron said Friday that it was putting its flagship British deepwater development project under review, saying high costs might not make it viable to continue. |
| The company said that rising costs of offshore drilling, pipelines and other related equipment and activities meant that the project, called Rosebank, “does not currently offer an economic value proposition that justifies proceeding with an investment of this magnitude.” | The company said that rising costs of offshore drilling, pipelines and other related equipment and activities meant that the project, called Rosebank, “does not currently offer an economic value proposition that justifies proceeding with an investment of this magnitude.” |
| If the project were killed, it would be a blow to the European offshore industry, particularly in Britain. | If the project were killed, it would be a blow to the European offshore industry, particularly in Britain. |
| In an interview, Stacey Olson, Chevron’s general manager for asset development in Europe, said financial data the company had received in the last couple of months had prompted the shift. “We see costs rising,” she said. “We need time to review to make sure we can get Rosebank over our economic hurdles.” | In an interview, Stacey Olson, Chevron’s general manager for asset development in Europe, said financial data the company had received in the last couple of months had prompted the shift. “We see costs rising,” she said. “We need time to review to make sure we can get Rosebank over our economic hurdles.” |
| But Ms. Olson cautioned, “We are not exiting the Rosebank project.” She said she was speaking only for Chevron, which owns 40 percent of the project. OMV of Austria and Dong Energy of Denmark also own stakes. | But Ms. Olson cautioned, “We are not exiting the Rosebank project.” She said she was speaking only for Chevron, which owns 40 percent of the project. OMV of Austria and Dong Energy of Denmark also own stakes. |
| And yet the announcement was further evidence of the investor pressure on oil companies to control heavy capital demands as undersea exploration moves into deeper and riskier waters. | And yet the announcement was further evidence of the investor pressure on oil companies to control heavy capital demands as undersea exploration moves into deeper and riskier waters. |
| “For all the companies, capital spending has gone straight up” but profitability has not improved, said Fadel Gheit, an analyst at Oppenheimer & Co. in New York. He predicted that costly recent projects would be in trouble if oil prices fell to $70 or $80 a barrel. Brent crude, the North Sea blend, currently sells for about $110 a barrel. | “For all the companies, capital spending has gone straight up” but profitability has not improved, said Fadel Gheit, an analyst at Oppenheimer & Co. in New York. He predicted that costly recent projects would be in trouble if oil prices fell to $70 or $80 a barrel. Brent crude, the North Sea blend, currently sells for about $110 a barrel. |
| On Nov. 14, Mr. Gheit wrote that the company’s stock was up 10 percent for the year, outperforming the 6 percent average improvement of its peers. On Friday, Chevron’s stock was little changed at $123.50 in New York. | On Nov. 14, Mr. Gheit wrote that the company’s stock was up 10 percent for the year, outperforming the 6 percent average improvement of its peers. On Friday, Chevron’s stock was little changed at $123.50 in New York. |
| Chevron’s capital spending was up 27 percent for the first nine months of 2013 compared with a year earlier, to $28.9 billion, as the company developed projects in Australia and the deep waters of the Gulf of Mexico. “It is not an issue about limited capital,” Ms. Olson said. “For Chevron, every project has to generate a minimum economic return. As Rosebank is currently being modeled, it does not.” | |
| Chevron earns among the highest profits per barrel in the industry because its output is skewed toward oil, as opposed to natural gas, whose price has been falling. | Chevron earns among the highest profits per barrel in the industry because its output is skewed toward oil, as opposed to natural gas, whose price has been falling. |
| Even as questions continue about the future viability of the offshore industry north of Scotland, in some respects the British industry is thriving. Overall investment this year, about 13.5 billion pounds, or $21.9 billion, is at an historically high level. But the spending masks “serious underlying problems,” according to a recent study for the government by Sir Ian Wood, the founder of Wood Group, an oil services company based in Aberdeen, Scotland. | Even as questions continue about the future viability of the offshore industry north of Scotland, in some respects the British industry is thriving. Overall investment this year, about 13.5 billion pounds, or $21.9 billion, is at an historically high level. But the spending masks “serious underlying problems,” according to a recent study for the government by Sir Ian Wood, the founder of Wood Group, an oil services company based in Aberdeen, Scotland. |
| Mr. Wood noted that production had declined 38 percent over the last three years on the British continental shelf and that a fall in exploration spending had meant that fewer than 50 million barrels were found in 2012, a very low amount. | Mr. Wood noted that production had declined 38 percent over the last three years on the British continental shelf and that a fall in exploration spending had meant that fewer than 50 million barrels were found in 2012, a very low amount. |
| Chevron has struggled with the development of Rosebank ever since it discovered the field in 2004, about 3,600 feet below the surface of the Atlantic Ocean west of the Shetland Islands. Beyond the sheer depth of the ocean at Rosebank, installations there would need to be designed to withstand severe weather that can include 100-foot waves. | Chevron has struggled with the development of Rosebank ever since it discovered the field in 2004, about 3,600 feet below the surface of the Atlantic Ocean west of the Shetland Islands. Beyond the sheer depth of the ocean at Rosebank, installations there would need to be designed to withstand severe weather that can include 100-foot waves. |
| What is more, the oil deposits lie under a layer of basalt, making them difficult to find using seismic technology. Chevron and its partners have already spent hundreds of millions of pounds on drilling, design work and efforts to understand the field, Stuart Klein, the project manager, said in an interview last summer. | What is more, the oil deposits lie under a layer of basalt, making them difficult to find using seismic technology. Chevron and its partners have already spent hundreds of millions of pounds on drilling, design work and efforts to understand the field, Stuart Klein, the project manager, said in an interview last summer. |
| Chevron had also obtained favorable tax allowances from the British government that made Rosebank more financially viable, Mr. Klein said at the time. | Chevron had also obtained favorable tax allowances from the British government that made Rosebank more financially viable, Mr. Klein said at the time. |
| One drawback is that the estimated recoverable amount of oil and gas for Rosebank is 240 million barrels. While that is a lot of petroleum, it is relatively small for the billions of dollars in further investments that would be required to produce it. | One drawback is that the estimated recoverable amount of oil and gas for Rosebank is 240 million barrels. While that is a lot of petroleum, it is relatively small for the billions of dollars in further investments that would be required to produce it. |
| In a possible sign of cost concerns, earlier this year Statoil, Norway’s state-controlled oil company, sold its 30 percent stake in Rosebank to OMV, the Austrian company, as part of a $2.65 billion package of North Sea assets. | In a possible sign of cost concerns, earlier this year Statoil, Norway’s state-controlled oil company, sold its 30 percent stake in Rosebank to OMV, the Austrian company, as part of a $2.65 billion package of North Sea assets. |
| OMV now owns 50 percent of Rosebank but is open to selling its stake down to 30 percent. Johannes Vetter, an OMV spokesman, said that Chevron’s announcement did not surprise OMV, adding: “We still believe it is an exciting project. It just needs time to study.” | OMV now owns 50 percent of Rosebank but is open to selling its stake down to 30 percent. Johannes Vetter, an OMV spokesman, said that Chevron’s announcement did not surprise OMV, adding: “We still believe it is an exciting project. It just needs time to study.” |
This article has been revised to reflect the following correction: | |
| Correction: November 23, 2013 | |
An earlier version of this article misquoted Stacey Olson, Chevron’s general manager for asset development in Europe. Her quote should have said the review of the Rosebank project was not an issue of limited capital, rather than that it was. |