How Crucial Is The Papua New Guinea LNG Plant For ExxonMobil?

Aug. 6.14 | About: Exxon Mobil (XOM)

Summary

XOM's production has reached a five-year low, as the company hankers after solutions.

The Papua New Guinea plant has surprised everyone by reaching full potential within just three months of starting up.

XOM is planning on investing in 21 projects in the next three years.

Hides, a field in Papua New Guinea, has a lot of gas, which warrants the addition of another train on the facility.

ExxonMobil (NYSE:XOM) has recently reported Q2 earnings of $8.78 billion for the year 2014 on revenue of $111.65 billion, which was more than what the analysts had predicted. The 28% earnings hike compared to Q2 of 2013, was despite the company reaching the nadir of production - lowest in five years. As the production dips, the company hierarchy has been hankering after solutions. They seem to have found one in Papua New Guinea.

LNG in Papua New Guinea

Among the Q2 highlights for XOM was the company shipping LNG from its Papua New Guinea LNG plant. The LNG project is not producing at full capacity, after it commenced ahead of schedule. The plant was originally expected to operate at full capacity by the end of the current year, but it has surprised one and all - including the XOM hierarchy - by reaching full potential within just three months of starting up.

XOM is collaborating with Oil Search and Satos and is vying to address the precipitously escalating natural gas demand in Asia. The project's cost is $19 billion, and should see XOM up the ante on its profits in the near and long-term future.

Enhanced Capacity

The two trains of the project in Papua New Guinea can produce around 6.9 million metric tons per year (tpy) of LNG annually, which would help XOM make up for the 5.6% YoY crude oil and LNG loss owing to the Abu Dhabi concession's cancellation. There are long term contracts with China Petroleum & Chemical Corp (NYSE:SNP), Osaka Gas (OTC:OSGSY), Taiwan's CPC Corp and Tokyo Electric Power (OTCPK:TEPCY) as well. The plant is all set to load its 15th cargo soon. Oil Search's production for this year is prognosticated to be 20 million bbl.

XOM hasn't been able to capitalize on high oil prices because of its capacity and the inability to increase production levels. Even though XOM conjured $22.55 per barrel profit in Q2, which was the most since 2008's oil price surge, the company couldn't manage to make the full of it owing to insufficient production.

The challenge to replace the oil and gas void owing to its work in depleting fields has let the company down of late. Hence, the enhanced LNG capacity that the Papua New Guinea plant brings is going to be crucial for XOM's production and revenues. This, and the fact that the company is looking to add to its overseas investments are signs that XOM is pressing on to make up for lost ground. Investing in new projects would ensure that the demands of global economy, and of its own shareholders, are met by XOM.

Increasing Expenditure

XOM's expenditure on capital is increasing, with the company predicting the figure to touch the $38 billion mark by 2017. In the last three years the company's capital expenditure has witnessed a growth rate of 4.3%. FY13 saw $33.7 billion worth of capital investment.

XOM is planning on investing in 21 projects in the next three years. They are touted to add a million oil equivalent barrels per day, to the company's current production. Some of these projects include Kearl Expansion Project and Beaumot refinery expansion. XOM has penetrated the European borders as well with a $1 billion refinery in Belgium waiting in the wings.

XOM has installed 42,000-ton topsides in a drilling rig called Berkut, which would be the largest offshore oil and gas production platform in Russia once it commences operation later this year. By going ahead with its Russian projects, XOM has also made it clear that it is pursuing its own interests over any political statements. And it's in the company's interests right now to ensure that it enhances production to capitalize on its profits.

Lucrative Investment

XOM's partner Oil Search is optimistic that it would be able to unearth more than enough gas in Papua New Guinea to justify expanding process facilities further. Oil Search believes that the county's highlands, especially a field called Hides, have a lot of gas which warrants the addition of another train on the facility. If by the end of the year Hides manages to prove to be opulent enough, it would combine with the gas from the P'nyang field to put a full stop to XOM's three-year plunge in production and maybe add a resounding exclamation mark!

If everything goes according to plan, XOM would be seen revamping its production in the near future, with the Papua New Guinea plant playing its due part. Once XOM's new projects start shaping up, it would be hard to look elsewhere for investments, especially in the energy sector. This is precisely why XOM is a lucrative long-term investment.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.