Oil producers curb megaproject ambitions to focus on U.S. shale

A stubborn 16-month crude rout with no end in sight is driving the largest U.S. oil producers away from costly, high-risk megaprojects long touted as the industry’s future and toward safer shale operations that generate the cash needed to satisfy anxious investors.

Exxon Mobil Corp., Royal Dutch Shell Plc, Chevron Corp., ConocoPhillips and Hess Corp. have all either delayed or abandoned projects that range from the deep seas of the Gulf of Mexico to Canada’s oil sands and the U.S. Arctic. At the same time, Exxon and Chevron both announced plans to substantially increase U.S. crude production, largely as a result of their shale operations.

“What makes more sense in this environment: drill a $100 million well in the deepwater Gulf that might come up empty, or poke lots of holes in west Texas where you already know there’s oil for a few million apiece?” said Michael Webber, deputy director of the University of Texas Energy Institute.

Explorers are expected to slash spending on deepwater wells by 20 percent to 25 percent next year, compared with a 3 percent to 8 percent overall reduction on all types of fields, according to Barclays Plc analysts including J. David Anderson. The types of giant reservoirs that require megaproject treatment are now found in only the roughest, deepest and coldest parts of the world.

One example: An equipment failure forced Chevron to put its $5.1 billion Big Foot development, a deepwater Gulf of Mexico project that was supposed to begin pumping crude this year, on hold until at least 2018. The San Ramon, California-based company hasn’t said whether the delay will bloat the price tag, which already had risen 28 percent from a 2010 estimate of $4 billion.

International producers are failing to deliver 80 percent of megaprojects on time and on budget, compared with about 50 percent in 2005, said Neeraj Nandurdikar, oil and gas director at Independent Project Analysis Inc.

“It’s really bad for megaprojects now,” said Joseph Triepke, managing director at Oilpro.com and a former analyst at Citadel LLC’s Surveyor Capital unit. “When oil was $90 or $100 a barrel, there was a lot of wiggle room to make a return. But at $45 oil, there’s no wiggle room. Enormous projects can’t go over or be late.”

West Texas Intermediate for December delivery rose 26 cents to $46.32 a barrel on the New York Mercantile Exchange at 6:57 a.m. local time.

Exxon and Chevron may update investors on their biggest ventures when they report third-quarter results on Friday. “Chevron is taking actions responsive to the current price environment,” said Kurt Glaubitz, a company spokesman. “We are getting our cost structure down and actively managing to a smaller capital program.” An Exxon spokesman declined to comment.

ConocoPhillips, the third-biggest U.S. oil producer, cancelled plans in July to search the deep Gulf of Mexico this year.

Analysts say terminating a long-term rig lease may cost the Houston-based company as much as $400 million.

Other megaproject disappointments include Exxon’s Kearl oil-sands development in western Canada, where logistical challenges and harsh weather repeatedly delayed the $12.7 billion project before its opening in 2013.

Plans to increase output again by 2020 have been shelved indefinitely. At Chevron’s gas-export project in Gorgon, the largest construction undertaking in Australia’s history, rising labor costs helped bloat the price tag by about 20 percent to $54 billion.