Seeking Alpha
Value, growth at reasonable price, long/short equity
Profile| Send Message|
( followers)  

Summary

  • Growing Asian demand for LNG presents a great opportunity for Chevron.
  • Chevron owns three facilities that will be able to produce 34 million metric tons of LNG per year and help meet the growing Asian demand.
  • With LNG demand expected to rise in Asia by 165% from 2010 to 2025, Chevron is well positioned to capture this growing market.

Rising prices and demand for LNG in Asian markets represent a great opportunity for Chevron Corporation (NYSE:CVX). The company owns three facilities that will help Chevron supply Asian countries with all the LNG they desire.

The Opportunity

James Hand, an oil and gas analyst at GlobalData, expects a large boom in LNG exports from Australia. Hand projects that Australia will take over Qatar and become the world's primary liquefied natural gas (LNG) exporter by the end of the decade.

These exports will be arriving at Asian-Pacific markets which are in great need for energy, especially LNG. Exxon Mobil previously reported that it anticipates Asian LNG demand to rise by 165% to 370 million tons per year from 2010 to 2025. In Japan specifically, all 48 nuclear reactors were shut down because of the Fukushima crisis. Because an entire source of power vanished, the price of LNG has been extremely high compared to the rest of the world.

The spot price for LNG in Japan was $18.30/mmBtu in the month of March. In America, The Henry Hub spot price of natural gas stood at $4.50/mmBtu over the same period. Even in Asian markets on the whole, LNG is expensive with spot prices running around $15.50/mmBtu at the end of March.

Because of this vast difference in price, many companies, including Chevron, are trying to seize the opportunity. Asian markets are craving energy sources and these LNG plants will make Chevron well positioned to take advantage of the need.

Kitimat LNG

The Kitimat LNG project is located in Canada in the province of British Columbia. This project includes a two-train, 10 million metric ton per year LNG facility. The facility and supporting pipeline are still several years out from the expected date of completion but there is still progress being made on the facility.

In February 2013, Chevron acquired a 50% stake in the Kitiman LNG facility, the Pacific Trail Pipeline, and the Horn River and Liard shale gas basins. Chevron bought these assets from Apache Corporation (NYSE:APA) and although Chevron only owns 50%, it is Chevron who will be operating the Kitimat facilities and the pipeline. Apache will still operate the upstream assets in the basins.

The Kitimat LNG facility is currently in the "front-end engineering and design" (FEED) stage of development. In March 2011 KBR, an engineering and construction firm, announced that its company will undertake this project. Once KBR finishes its part in the development of the facility, Fluor Corporation will take over for the engineering, procurement, and construction (EPC) stage.

Source: Chevron 2014 Investors Presentation

Source: 2014 Investors Presentation.

The Kitimat LNG plant will service two shale basins within the province of British Columbia: the Liard and Horn River basins. Between the shale basins and the Kitimat facility lies the Pacific Trail pipeline, which is owned by Chevron and Apache.

After being extracted in the basins, the gas will be transported south to Summit Lake. Once the gas reaches Summit Lake, the joint-owned Pacific Trail pipeline will take the gas west to the Kitimat facility.

While the production of the facility and accompanying pipeline continues, Apache and Chevron are beginning to market the LNG that will be produced.

Because the Kitimat facility is on the coast of British Columbia, it is perfectly placed to service many growing Asian markets including South Korea, China, and Japan. Once finished, this facility will have the ability to export 10 million tons of LNG per year. The projected completion date for Kitimat LNG is somewhere between 2017 and 2020.

Gorgon LNG

Chevron's Gordon Project is a two-part natural gas project. The first part is an LNG plant, the second part is a domestic gas plant. The Gorgon LNG plant is located on Barrow Island which is an island located off the shore of Australia. When finished, the plant will be able to ship 15.6 million tons of LNG per year.

By 2018, Australia predicts it will export 85.8 million tons per year. The Gorgon Project alone will account for 18% of Australia's projected LNG exports. The total estimated cost for the first phase of development is $54 billion. The Gorgon Project is estimated to be completed by mid-2015.

The Gorgon Project is operated by Chevron but is also a joint venture combining several big oil and gas companies. Chevron has control with 47.3% ownership and is partnered with ExxonMobil (25%), Shell (25%), Osaka Gas (1.25%), and Chubu Electric Power (0.4%).

Source: Gorgon Project Fact Sheet

Source: Gorgon Project Fact Sheet.

The LNG plant services two gas fields -- the Gorgon and Jansz-lo gas fields. On these fields will be 18 gas wells, 14 out of the 18 planned have been drilled and completed. Connecting the gas fields to the LNG facility on Barrow Island are two pipelines. Both of these were completed in 2013.

The pipeline that will connect Gorgon LNG to the mainland has recently finished being installed. This pipeline will allow gas transport from the mainland to the LNG facility to be liquefied and shipped. Once the first train is completed in mid-2014, Chevron will start allowing natural gas to be transported into the facility in late 2014.

Although the main LNG facility won't be finished this year, the progress should keep investors optimistic. According to newly released documents at the beginning of May, the Gorgon Project is 80% complete.

The construction of the Gorgon Project hasn't stopped Chevron from ensuring revenue for years to come. The company has signed binding, long-term LNG purchase agreements with six Asian customers for delivery of about 4.8 million metric tons of LNG per year. Considering the facility will be able to produce 15.6 million tons of LNG per year these sales are a great start for still being over a year away from actual production.

Wheatstone Project

The Wheatstone facility is designed to work in junction with Gorgon Plant to provide LNG to the Asia-Pacific region. It is located just south of Barrow Island where the Gorgon LNG plant located. When completed, the Wheatstone Project will be a two-train, 8.9 million metric ton per year LNG facility. If Australia increases its exports to the 85.8 million ton target, this would represent over 10% of Australia's LNG exports.

The Wheatstone Project isn't as far along in production as the Gorgon Project. According to the company, it is only 30% complete. In an update on May 2 the company announced that it is working to lay the foundation of the LNG tanks as well as the LNG trains.

Source: Wheatstone Project website

Source: Wheatstone Project website.

The Wheatstone facility will service the Brunello, Lago, Wheatstone, and Julimar gas fields. All of these lie off the shore of Australia as shown in the diagram to the left. These fields will be connected to the Wheatstone LNG facility by pipeline.

The LNG facility will be a joint venture with several other companies. Chevron holds a controlling share (64%), and will be working with Apache Corporation (13%), Kuwait Foreign Petroleum Exploration Company (7%), Shell (6.4%), and Kyushu Electric Power Company (1.5%). The first train is expected to start up in 2016 so there is still some time before this plant brings in any revenue for the company. However, just like the Gorgon Project, Chevron has also found buyers for LNG once the Wheatstone facility is finished.

In July 2011, Chevron signed a purchase agreement with TEPCO, a Japanese power company, for 3.1 million tons of LNG per year. In March 2013, the company signed another purchase agreement with Chubu Electric Power Company (another Japanese company) for 1 million tons of LNG per year. Both contracts will be good for up to 20 years.

Conclusion

Rising demand and LNG prices in Asian countries are a great opportunity for Chevron. These three LNG plants will enable the company to supply Chevron will the LNG that it desperately needs.

Source: These 3 Facilities Will Help Chevron Capture The Asia-Pacific LNG Market