62 Business The Economist November 6th 2021
TheGorgonknot
B
arrow island, off the coast of Western Australia, is an unlike
ly place to find what will with luck become the highwater
mark of the hubris of the West’s international oil companies
(iocs). It is a nature reserve dotted with termite mounds. Since it
was severed from the mainland about 8,000 years ago, its local
species, including golden bandicoots and spectacled harewalla
bies, have lived free from predators. Some call it Australia’s Gala
pagos. Yet a sliver of it is also home to one of the world’s biggest
liquefied natural gas (lng) developments, mostly owned by Chev
ron (47%), ExxonMobil (25%) and Royal Dutch Shell (25%).
Gorgon, as it is called, has a pockmarked history. It cost $54bn
to build, a whopping $20bn over budget. That was partly because
the cost of manpower and material soared amid a $200bn Austra
lian lnginvestment binge during the past decade. To respect the
sanctity of the island’s wildlife, Chevron enforced covidlike quar
antining. On arrival, thousands of construction staff had to be in
spected at the airport for stray seeds; bulldozers, diggers and
trucks were fumigated and shrinkwrapped before shipment.
Since production started in 2016, Gorgon has been dogged by un
planned outages. Tax filings suggest it has yet to make a profit.
And its failure so far to sequester fourfifths of the carbon dioxide
produced from its gas reservoirs has shredded the credibility of its
environmental commitments. Carbon capture is considered cru
cial for the future of lngon Barrow Island and elsewhere.
For all that, it is emblematic of the belief among iocs that even
if oil demand peaks as the world shifts to cleaner fuels, consump
tion of lngwill continue to grow for decades to come, especially
in Asia. Gorgon alone hopes to produce and ship natural gas until
the mid2050s, one day for considerable profits. A sharp rise in
lngprices in recent months amid a surge in demand from China
has fanned those hopes. Yet even as the majors double down on
the fuel, they are running up against the reality that it is becoming
harder to take controlling stakes in new megaprojects, and even
those they can develop have rising risks. lngis nothing like the
relatively safe bet the oil industry portrays it as.
The immediate problem the majors face is a shift in the balance
of power. The deep pockets and risk appetite of giants like Exxon
Mobil, Shell and TotalEnergies used to be essential for coping withthe challenges of building frozen gas factories in inhospitable
places. Now national champions in Qatar and Russia, home to the
most promising resources, say they can largely make do without
them. Qatar Energy, a gas giant, has taken the lead in developing
the biggest lngcomplex in history, a $30bn extension to its North
Field site. The iocs have been relegated to bidding for minority
stakes in the project, mostly giving them the right to market a
surge of Qatari gas that is expected to hit the market by midde
cade. Chinese oil companies may invest, too. The majors are
squeezed, says Giles Farrer of Wood Mackenzie, a consultancy.
Other opportunities have turned into nightmares. A jihadi con
flict on the northeastern coast of Mozambique has at least tempo
rarily halted a $20bn offshore lngproject by Total, which declared
force majeurein April. Neil Beveridge of Bernstein, an investment
firm, quips that it is “the only lngproject to hit force majeure be
fore it’s even started.” For the same reason, ExxonMobil’s $30bn
lngplan in Mozambique is in limbo. The firm has also been
bogged down for years trying to strike a deal with the government
of Papua New Guinea on a $13bn expansion. That leaves America’s
Gulf Coast as the most likely domain outside Qatar and Russia’s
Arctic to supply more lngin the next five years. But operators
there can secure gas to liquefy from producers across America,
and engineering skills from domestic construction companies.
That leaves the oil majors twiddling their thumbs.
They still have scope to build some projects. But for those a
structural change in the lngmarket poses a further challenge. As
Alastair Syme of Citi, a bank, explains, for decades the majors re
duced the risk of longterm investments by striking 20yearplus
contracts with big customers, such as Japanese utilities. However,
a slide in the spot price of lngin the second half of the 2010s
caused a rethink. Buyers have shifted to shorterterm contracts
(say ten years) or the spot market.
The recent spike in spot prices may change the mood once
again. Nonetheless some buyers face such uncertainty about the
future of natural gas because of the growth of renewables that they
will remain loth to sign longterm contracts. For iocs, the corol
lary is that shorter contracts increase the risk of lnginvestments
with long paybacks. This adds to the arguments for them to focus
on shortcycle projects to reduce the danger that, as the world
economy decarbonises, they will be left with stranded assets.Trading places
There is a way out of the bind. The majors, particularly European
ones, are turning from megaprojects towards trading cargoes of
other producers’ fuel. It reduces the amount of capital they have
tied up in heavy assets and dirty fuels. It also helps them keep their
promises to become portfolio companies trading all sorts of ener
gy sources in an era of mass electrification. But it’s a different
business. The barriers to entry are lower. There is competition
from trading houses such as Trafigura, Vitol, Gunvor and Glen
core. And Chinese firms like Sinopec, which last month signed
two longterm contracts with Venture Global lng, an American
exporter, are emerging as potential rivals.
It all adds up to uncertainty. The big investments, complex en
gineering and generationspanning paybacks of projects such as
Gorgon have long made the lngbusiness one of boom and bust. In
an era of shorterterm contracts, amid all the questionmarks as
sociated with climate change, the future may be no less volatile.
The world has changed since Gorgon was conceived. For theiocs,
the big bet on Barrow Island may soon belong to a bygone era.nSchumpeter
Supermajors are in a bind over their lngambitions