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Oil giants count cost of seeking out new frontiers

Financial Times: Oil giants count cost of seeking out new frontiers

“…Royal Dutch/Shell said its giant Sakhalin-2 liquefied natural gas project was at least eight months behind schedule and would cost $20bn – twice the original price.”: “Gazprom, Russia’s state-controlled gas monopoly, is seeking to improve the terms of a swap deal signed earlier this month with Shell.”

Monday 18 July 2005

By Thomas Catan

Published: July 18 2005

The world’s largest oil companies face increased dangers as they push the existing boundaries of technology into ever more unforgiving environments, as setbacks for two of the industry’s “supermajors” demonstrated last week.

BP’s flagship ultra-deepwater Thunder Horse platform was left listing perilously after Hurricane Dennis hit the Gulf of Mexico. Fears that it could sink have abated, as workers partially righted it over the weekend. But they are in a race against time, with Hurricane Emily expected to strike the Gulf this week.

The $1bn (£570m) platform, the largest of its kind, sits in more than 6,000ft of water. It was set to produce 250,000 barrels of oil a day from the end of this year.

But the opening could now be substantially delayed, costing BP around 4.5 per cent of next year’s oil and gas production, according to Goldman Sachs.

On the other side of the world, Royal Dutch/Shell said its giant Sakhalin-2 liquefied natural gas project was at least eight months behind schedule and would cost $20bn – twice the original price.

Shell blamed the spiralling cost on factors including rising raw material prices, Russian inflation and exchange rate fluctuations. But it also said the project had turned out to be far more expensive because of its location on a remote island coast which is frozen for much of the year. Shell has also had to delay work on environmental concerns and had to re-route one pipeline to avoid whale feeding grounds.

“The large, frontier projects are the most difficult to estimate well,” said Jeroen van der Veer, Shell’s chief executive.

“If you go to the very frontier areas of this world and then you get new facts, for instance about whales, which have to be taken into account, or all kinds of climate problems, then [the] scope [of the project] changes.”

Oil majors are having to turn to difficult projects in challenging environments because they lack access to the countries where oil is easily available.

The countries that own accessible resources no longer need their expertise to extract the oil and sell it in foreign markets.

So to add value, companies must undertake projects that would be too technically challenging, complex or expensive for governments alone.

Even here, state-owned companies are making inroads. Brazil’s Petrobras has conducted pioneering deepwater work, but it has also felt the dangers. In 2001, the then-largest offshore platform sank off the Brazilian coast after explosions killed 10 people.

* Gazprom, Russia’s state-controlled gas monopoly, is seeking to improve the terms of a swap deal signed earlier this month with Shell.

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