Shell Decision Another Black Eye for Louisiana's Energy Future

Dec 09, 2013 | Updated Feb 05, 2014

What can cost a billion dollars more each week before it even exists?

At the end of September, the Louisiana governor's office projected that a new gas to liquids project announced by Royal Dutch Shell would cost an estimated $12.5 billion. Less than a week into December, the multinational energy giant cancelled its plans amid reports that the cost estimates had soared to roughly $20 billion, which works out to an increase of more than $100 million a day.

Large infrastructure projects are the energy sector's version of Hollywood blockbusters; the focus of endless industry drama and rumor-mongering that swells in proportion with inevitably inflating budgets.

But what happened with Royal Dutch Shell's planned giant gas to liquids plant project in Louisiana is striking for both the scale and speed of that budget inflation and the suddenness with which the project -- years in the consideration -- was simply shelved.

Shell's Gulf Coast GTL project was hailed by Louisiana's Bobby Jindal with the usual enthusiasm governors reserve for projects that could bring thousands of highly-paid jobs to the state. Overshadowed in recent months by the burgeoning morass of the BP settlement process for the Gulf of Mexico oil spill following the fire at its oil platform Deepwater Horizon and a resulting ding to the state's reputation as a business-friendly locale, Louisiana's boosters welcomed the opportunity to note the arrival of a competing European energy giant on its shores.

Divining what exactly happened in Louisiana in the intervening eight weeks that made thousands of jobs and billions of dollars of investment evaporate is a challenge. Volatility in natural gas markets and opacity in forward pricing for the products from a GTL plant almost certainly played a role, with concerns about gas pricing forecasts and the competitive landscape for gas and gas products proliferating in many corporate head offices.

But that uncertainty has been in play for several years now, and project forecasts from oil companies are not developed in a scattershot way. Barring a serious problem in the forecasting practice at Shell, it was some situation on the ground that most likely caused such a speedy retreat from such a high-profile project.

Difficulty in sourcing qualified professionals to work on and at the site was raised in New York Times coverage by Oppenheimer analyst Fadel Gheit, and certainly energy companies have become increasingly public about their distress over a lack of science, engineering, technology and math (STEM) students in recent years. But the hiring landscape has not evolved significantly in the past eight weeks, and eight billion dollars of additional labor cost is surely sufficient to hire almost anyone to do almost anything.

Without arguing that Louisiana proved itself a poor location for business in eight weeks, one of the more conceivable triggers for a rethink by Shell is a new estimate of legal and regulatory risk. With governments at the national, state and local level targeting BP with surprising specificity and courts doing little to hold back the swelling lawsuit docket against the British oil giant, lawyers and executives at Shell may have taken another look at their legal reserves and their regulatory exposure to any problems in the Gulf.

It will take investigative work to determine exactly what happened with the Shell GTL plant cancellation this week, but the speed with which the project was announced and shelved speaks to underlying breakdown in project development consensus establishment in areas traditionally friendly to energy firms. For the US to take advantage of the shale revolution, there will need to be fewer Gulf Coast GTL episodes in the coming years.