Unocal Net Dives 54% for Full Year : Reflects $125-Million Write-Down for Its Shale Oil Project

Unocal disclosed Monday that it took a partial write-down of its controversial shale oil project in Colorado last year, which in turn contributed to a 54% year-to-year decline in the Los Angeles-based oil company’s 1985 earnings and a $134.7-million loss for the fourth quarter.

Full-year earnings, which fell to $325.1 million from $700.4 million in 1984, also were hurt by expenses incurred during Unocal’s successful takeover fight with Texas oilman T. Boone Pickens Jr. Higher interest costs and the loss of foreign tax credits also contributed to the lower full-year earnings, the company said.

Falling Oil Prices

While vowing to proceed with the alternative energy project, Unocal said it wrote down the project’s value by $125 million, after taxes, after a review of its status. A Unocal spokesman said the write-down was an “economic decision” based in part on a reassessment of the “anticipated cash flows” from the project.

Energy analysts say the current environment of plummeting oil prices almost certainly played a role in Unocal’s decision.

As the price of oil falls, it becomes increasingly harder to economically justify the huge expense of extracting energy from sources other than oil--shale, for example. And by partially writing down the value of its shale oil assets, these analysts said, Unocal is saying it expects no significant increase in oil prices over the next decade.

“I wasn’t anticipating the write-down,” said M. Craig Schwerdt, who follows Unocal for the firm Morgan, Olmstead, Kennedy & Gardner. “But with oil prices falling the way they are, it is going to be very tough to justify continuing an oil shale project. That plant makes less and less economic sense.”

Hartley’s Pet Project

Unocal’s Colorado project, a pet project of company Chairman Fred L. Hartley, is the last of four synthetic fuel programs financed by the U.S. government’s now defunct Synthetic Fuels Corp. To help it compete initially with oil, the federal agency over the years has awarded the project $900 million in government price supports. And just a week ago, in a controversial move after it was officially shut down by Congress, the agency awarded Unocal a $327-million federal loan guarantee to help finance a new combustion technology for the shale plant.

A Unocal spokesman said the company has until the end of this year to decide whether it will proceed to that stage. The plant has been shut down for repairs and modifications for several months. But testing is scheduled to resume this spring, the company said.

Hartley said in a statement that, over the past three months, Unocal has repaid $200 million of the $4.4-billion debt that it took on during its takeover fight with the Pickens investor group last spring. That expense, plus higher interest costs, reduced after-tax earnings by about $64 million for the fourth quarter and $210 million for the year, the company said.