Barrels of Losses at Point Arguello : Energy: Oil giants have taken a beating on the offshore project. They blame an excess of environmental activism. Activists worry about an Alaska-style oil spill.
On the same day Exxon Corp. took a writeoff of $500 million for costs to clean up oil spilled in the ocean, Chevron Corp. took a writeoff almost as large for its costs of leaving oil underneath it.
Chevron said it would take the third and largest charge so far in 1989 related to investment in the $2-billion Point Arguello project, an unsuccessful 10-year-old effort by a consortium of 18 oil companies to produce oil off the coast of Santa Barbara. The project has become a symbol--in the industry’s view--of the costs of environmental activism and regulatory intrusion.
The San Francisco-based energy giant followed Texaco Inc. and Phillips Petroleum Co., which reported smaller charges on their investments in the project, which sits idle despite completion two years ago because of continuing regulatory wrangling in the wake of the Alaskan oil spill. The partners are paying out $100,000 a day in operating, salary and maintenance expenses, Chevron said.
The writedowns are a final admission that “in the present business climate . . . the project is not worth the investment made,” according to a Phillips statement.
Chevron blamed an “irrational” regulatory process under which the project has jumped through the hoops of 44 separate agencies and paid more than $100 million in environmental mitigation measures with no prospect of immediate production.
Notwithstanding industry arguments, however, blame for the project’s financial problems may also lie with the overly optimistic projections of the oil companies that came together more than a decade ago to develop an immense oil field whose reserves are estimated at possibly 300 million barrels.
At the time the project was conceived in 1979, oil was in short supply and selling for about $35 a barrel. By 1990, companies were projecting prices as high as $85 a barrel--about four times their current prices. The project was planned with such prices in mind; executives now admit that they would have vetoed the project had they foreseen prices around $22 a barrel, where they are now.
“If you want to spread the blame around, the oil industry blew millions of dollars based on assumptions that oil prices would be a lot higher,” said Rosario Ilacqua, an industry analyst with Nikko Securities Co. in New York. “I think the economic decision was a mistake.”
Said one Texaco executive, who asked not to be identified: “I think at the time, it was the right thing to do. . . . The mind-set of the nation was to get away from Arab oil and everyone was gung-ho about domestic reserves. . . . But things change, unfortunately.”
Still, no one faults the oil companies for the delays that have drawn the project out longer than anyone could have reasonably expected. “The environmental pressures tightened up directly in response to the Exxon Valdez incident, and who the hell could have predicted that?” asked William Randol, an industry analyst with First Boston Corp.
The writedowns reported this month:
* Chevron, the lead partner in the consortium, took the largest writedown on its investment in Point Arguello, reporting Wednesday a fourth-quarter charge of $445 million. The writedown reflects only part of Chevron’s estimated $800-million investment in Point Arguello.
* Phillips Petroleum Co. said Jan. 17 that it would write down an estimated $280 million after taxes on its offshore California investments, including Point Arguello.
* Texaco Inc. said Jan. 18 that it would take a $164-million charge against its exploration and production earnings for environmental costs and reduction in the value of its investments. That charge included about $60-million in after-tax writedowns for Texaco’s investment in Point Arguello.
* Pennzoil Co. will report its earnings next week, but would not say whether it will take a charge on its investment. Two years ago, Pennzoil took a $225-million charge before taxes partly on investments in non-producing properties including Point Arguello, said spokesman Bob Harper.
* Of the project’s other major partners, neither Atlantic Richfield Co. nor Oryx Energy Co. took writedowns on Point Arguello in 1989. Arco’s main interest is in the project’s onshore facilities. Oryx, formerly Sun Oil, has a relatively small investment in offshore production. Neither was hurt by the delays as much as the larger partners.
Chevron and its partners paid more than $500 million in 1979 for the rights to the Point Arguello offshore leases--the most ever recorded for such rights.
Oil was discovered in 1981, and the consortium of oil companies invested more than $2 billion to build three platforms--Hidalgo, Hermosa and Harvest--as well as oil and gas pipelines, onshore treatment plants and a marine terminal. The project was designed to process 100,000 barrels of oil and 60 million cubic feet of gas a day.
In May, 1989, the last hurdle to full production was apparently removed when Santa Barbara County issued a permit to allow tankering of oil from the terminal at Gaviota to refineries in Los Angeles.
But in the wake of the Exxon Valdez oil spill in Alaska, the Santa Barbara League of Women Voters and a local citizens group, Get Oil Out, appealed the permit to the California Coastal Commission, which in August revoked permission.
“Alaska showed us that our oil spill cleanup plan here was inadequate,” said Carole Ann Cole, a spokeswoman for Get Oil Out, who also invoked the memory of the devastating platform blowout in the Santa Barbara Channel that fouled beaches with oil in 1969.
In October, Chevron sued the Coastal Commission and reapplied for a tankering permit. The county commissioned a study of the relative costs of shipping oil by pipeline, which found that pipeline transportation would cost much more than tankering; the county has now ordered a new environmental impact report.
As a result, it is increasingly unlikely that the project will begin production before 1991, said Chevron spokesman G. Michael Marcy in Ventura.
Despite the delays and virtually no chance of net income from the project, the oil companies continue to push for eventual production, hoping to realize at least some cash flow to cover their initial investments. “Obviously, most of our costs are sunk and the money’s been spent,” said the Texaco executive.
POINT ARGUELLO LEASES
Interest in Point Arguello offshore leases:
Hermosa: Chevron 40%, Phillips 40%, Union Pacific Resources 20%.
Hidalgo: Chevron 50%, Phillips 50%
Harvest: Texaco 35%, Pennzoil 25%, Oryx 20%, others 20%.
Project partners with no interest in offshore leases include Arco, through its pipeline subsidiary, and Unocal.
Source: Chevron and other oil companies.
