Royal Dutch Shell plc (ADR) (RDS.A), Chevron Corporation (CVX), Exxon Mobil Corporation (XOM): Why Oil Majors Are Betting Billions on This Unattractive Market

Chevron Corporation (NYSE:CVX)’s Gorgon budget inflated by 41% to $52 billion. Similarly, in Queensland, the BG Group and Santos have also faced cost blowouts in their LNG ventures while Shell is mulling abandoning its Arrow LNG project. Last year, Santos upped the budget for its Goldstone LNG project by 15% to $18.5 billion while BG’s gas export plant in Queensland has seen its cost estimates rise by 36% to $20.4 billion.

Why Invest in Australia?

The current business environment in Australia for offshore oil and gas development is far from attractive.The Australian government needs to take Voser’s suggestions seriously, particularly since they are coming from the head of a firm that is one of the biggest foreign investors in the country. Even locals, such as Woodside Petroleum, are reluctant to give green signal to their ventures. A friendlier regulatory and taxation environment can allay some of the fears of energy firms that are investing billions in Australia.

However, I believe that despite the financial challenges, oil majors such as Shell, Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) will continue to invest heavily in Australia because of the overwhelming need to constantly find new reserves to remain competitive for the long term.

These companies are even willing to invest billions of dollars in politically challenging regions. For instance, both Shell and ExxonMobil are some of the leading investors in Iraq, which I have highlighted in a previous article. ExxonMobil is even working closely with the volatile semi-autonomous Kurdistan region in Iraq. Similarly, Chevron is betting billions of dollars on Argentina and its oil producer YPF to gain access to world’s second-largest shale oil basin.

Therefore, Royal Dutch Shell plc (ADR) (NYSE:RDS.A), Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) are relatively riskier investments now than they were before as they are willing to take on political and financial challenges to bolster their reserve portfolios.

Benefits outweigh risks

There are also considerable potential rewards here as these riskier investments will improve their reserve-replacement ratios, which will ensure that the companies stay competitive for decades to come. Therefore, the benefits outweigh the risks, especially for Shell, which is one of the leading investors in Australia. The Australia region is considerably less challenging and has abundant natural gas reserves as compared to some developing countries. Moreover, there simply aren’t that many places left to explore and the oil companies have few options but to hunt for oil in politically or environmentally challenging regions of the world.

Royal Dutch Shell plc (ADR) (NYSE:RDS.A), Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE:XOM) are going to move forward with their LNG development, particularly the more flexible FLNG projects. The companies may delay their final investment decisions or abandon some of the onshore projects but through more business friendly policies, the Australian government can offset the problems coming from higher operational costs.

The article Why Oil Majors Are Betting Billions on This Unattractive Market originally appeared on and is written by Sarfaraz Khan.

Sarfaraz Khan has no position in any stocks mentioned. The Motley Fool recommends Chevron. Sarfaraz is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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