Big Oil`s Project Costs No Longer Sticker Shock for Wall St

In 2005, Royal Dutch Shell PLC (RDSA) disclosed a cost overrun of roughly $10 billion at its giant Sakhalin 2 project in Russia, a disclosure that shocked the market and embarrassed the oil giant.

Last week, after much delay and hand-wringing over swelling costs, Shell and partner Saudi Aramco green-lighted a $7 billion project to expand the jointly-owned Motiva Enterprises LLC refinery in Port Arthur Texas. Motiva had previously estimated the project cost at $3.8 billion.


While Shell and Motiva officials were a bit sheepish about the higher price tag at Port Arthur, nobody is shocked or outraged anymore by this sort of cost overrun – and that reaction says a lot about how attitudes have shifted over time.

The energy industry`s limits in capacity, in manpower, supplies and time are well understood by now. And explaining such a large cost overrun to Wall Street has become easier amid persistently high commodity prices that cushion the financial impact.

The industry suffered from “sticker shock” two years ago, but “there`s not the same sort of surprise anymore,” said long-time industry analyst and author Dan Yergin. “There`s a recognition that this is the new reality, and it`s particularly obvious in terms of these mega-projects.”

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