How much of a 'Gamble' is Chevron's Australian Shale Gas Project?

Chevron (NYSE: CVX) has announced that it has signed a deal with Beach Energy to form a joint venture which will give it a share of 810,000 acres in the Australian outback, where it is estimated that trillions of cubic feet of shale gas lie.

The fields, in the Australia’s Cooper Basin are still very early in their development, and far from any potential LNG export terminal, which has led the Wall Street Journal to label the deal a “gamble”.

But just how risky is it really?

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On paper the deal has been listed as $349 million, but really the initial investment is far less. Chevron will contribute just $95 million in cash during stage 1 of the project, and receive between 18% and 30% of the licences; it will also fund $95 million over the next two years to drill the exploration blocks. The total $180 million is so little that Chevron didn’t even deem it worthy of a press release. It represents a mere drop in the ocean considering Chevron is anticipated to spend $36 billion in 2013, and pails in comparison to other Chevron projects in Australia, such as the Gorgon and Wheatstone LNG projects into which they will pour around $40 billion.

Depending on the success of stage 1, Chevron can then opt to invest an extra $124 million for a larger stake in the project, and continue to drill exploration wells. Not the riskiest of investments in truth, although the problem of a lack of LNG export terminals has still not been addressed.

By. Joao Peixe of Oilprice.com