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LNG bulls running again Huge Asian contracts suggest confidence region’s long-term expansion won’t slow Allen Baker For Petroleum News
Gloom and doom about Asia’s long-term demand for liquefied natural gas are evaporating about as fast as the fuel itself does at room temperature. Big money deals are being signed between utilities and suppliers, and a $15 billion project near Australia just got the green light.
One of the biggest LNG supply contracts ever was signed Dec. 4. Chevron announced the deal with Tokyo Electric Power Co. to deliver up to 4.1 million metric tons of LNG annually for up to 20 years from its proposed Wheatstone Project in northwestern Australia. The deliveries amount to the equivalent of 189 billion cubic feet a year, at an estimate cost of about $82 billion over the life of the contract.
A few days later, ExxonMobil made a final investment decision on a $15 billion LNG project in Papua New Guinea, and immediately started letting construction contracts. ExxonMobil’s investment announcement Dec. 7 came just after TEPCO signed a deal for LNG from that project, on top of the Wheatstone contract a couple days earlier. Talk about a Christmas shopping spree.
ExxonMobil and its partners will ship TEPCO 1.8 million metric tons each year for two decades from the Papua New Guinea project. China’s Sinopec committed on Dec. 3 to take 2 million metric tons a year, also for 20 years.
Huge Deals The deal between TEPCO and Chevron is the biggest Australian LNG deal ever signed, according to the Western Australia government, which put the value at an eyebrow-raising $82 billion (U.S.).
Calculating dollar values for confidential long-term contracts is iffy at best, but it appears the big Asian utilities want to lock in supply, and are willing to pay rates that are basically at par with prices for a similar amount of energy from oil.
Some analysts had speculated earlier that the economic downturn would create an LNG glut, and that a significant spot market would develop as large LNG projects come on line in the next year or so in Qatar, Yemen, and elsewhere.
There are a few cargoes on the spot market, and some shiploads are coming to the United States as storage fills up elsewhere. U.S. LNG imports have amounted to 1.3 bcf per day so far in 2009, according to the Energy Information Administration, up from 1.0 bcf per day in 2008, when imports were depressed. But so far, it doesn’t look like a glut.
Asia’s LNG demand holds At this point, Asian demand is down only slightly from 2008 levels, and the International Energy Agency is predicting Asian consumption will rise 3.8 percent a year through 2030.
In Japan, the largest LNG importer, shipments in the first half of 2009 were 31.6 million metric tons, down 8.9 percent from the same period a year earlier. Oil imports dropped 14.8 percent in the same period and coal imports more than 20 percent. Japan’s LNG imports peaked at 66.8 million tons in 2007.
Tokyo Electric, or TEPCO, brings in about 20 million metric tons a year, the output of three good-size LNG projects. It’s been in the LNG import business since 1969, when it and Tokyo Gas Co. Ltd. started importing the fuel from — you guessed it — the Nikiski LNG facility in Alaska. TEPCO has been generating electricity with Alaska gas ever since, though the amount has dwindled to relative insignificance in recent years.
Across the rest of Asia, demand hasn’t shown a big drop despite slower economies. KOGAS, the state-owned monopoly importer for South Korea, expects a slight decline in LNG sales from the 2008 total of 26 million metric tons, blaming a slack economy that cut demand for electricity. Taiwan purchased 917,000 metric tons in October, up slightly from 915,000 tons a year earlier, paying about $8.80 per million Btu. That price is down from the peak in the $20 range, but still about double the price in the U.S. domestic market.
Exxon motors ahead Exxon’s Dec. 8 decision to proceed with its Papua New Guinea LNG project was followed the next day with the announcement of five construction and engineering contracts, including one with Chiyoda Corp. of Japan to build the liquefaction trains to produce 6.6 million metric tons a year.
With TEPCO taking 1.8 million tons and Sinopec 2 million, the project could add another major customer or a couple smaller ones.
The ExxonMobil project will represent the largest foreign investment ever for Papua New Guinea, an impoverished former colony of Australia that shares its island with Indonesia, and could provide a major boon to its economy.
The island has a welter of ethnic groups and has been prone to violence. The project will require a 190-mile overland pipeline plus a 250-mile undersea pipe to reach the proposed loading facility near Port Moresby, the capital. That makes it a dangerous proposition.
But ExxonMobil has some partners with experience in the country, notable Australia’s Oil Search, which has a 34 percent stake to 41.5 percent for Exxon and its affiliates. Santos Ltd., also of Australia, has 17.7 percent, Nippon Oil 5.4 percent, and a couple others the remaining share. The government of Papua New Guinea will get an equity stake later.
First shipments are expected late in 2013 or early in 2014.
Chevron coup Chevron’s huge sale to Japan’s TEPCO gives a big boost to the Wheatstone project in northwestern Australia, and may hurt other Australian developers looking for anchor customers — as well as scarce Australian laborers.
TEPCO is taking a 15 percent equity share in the offshore Wheatstone field licenses, as well as an 11.5 percent interest in the processing facilities to be constructed near Onslow on the coast.
A final investment decision won’t come until 2011, but landing the big Japanese customer is a good start. TEPCO will take nearly half of the initial annual capacity of 8.6 million metric tons.
“TEPCO is among the most experienced LNG buyers in the world,” noted John Gass, president of Chevron Global Gas. “Their commitment to secure long-term LNG supplies from Wheatstone is a strong demonstration of their confidence in Chevron and represents an important step forward for the project.”
Korea’s KOGAS has also said it’s interested in a share of the Wheatstone LNG.
Earlier this year, Chevron took on a couple of partners for Wheatstone, gaining added supply in the bargain. Subsidiaries of Apache Corp. and Kuwait Foreign Petroleum Exploration Co. agreed to become 25 percent equity partners and to supply 25 percent of the inlet gas from their Julimar and Brunello fields. Apache has 16.25 percent and KUFPEC 8.75 percent.
Chevron’s Wheatstone field is about 650 feet of water and was discovered in 2004. The nearby Iago field, another potential source, was found in 2000.
So far, there’s no firm cost estimate for the development. Chevron awarded a front-end engineering and design contract last July.
Huge gambles LNG projects represent major gambles for the companies involved — even firms such as ExxonMobil that generate monster cash flows.
The capital involved is billions of dollars; the timelines are long; the projects are complex and prone to overruns as well as expensive delays. Shell found that out at Sakhalin when the cost estimate doubled.
When Gorgon got investment approval this past fall, the development cost equaled a quarter of Chevron’s market capitalization. Chevron has a 50 percent share of the $37 billion project.
Still, profits from LNG also can be immense, and LNG represents one of the few growth areas available for major private energy companies as national oil companies take over more and more of the world’s oil fields and gas pipelines.
“The world’s growing demand for gas will challenge our industry to deliver projects on a scale that was barely considered even a decade ago,” said Tom Walters, president of ExxonMobil Gas and Power Marketing Co., at the International Petroleum Technology Conference in Doha, Qatar, Dec. 8. “The ability to conceptualize, commercialize and execute large-scale, multibillion-dollar projects has become an increasingly important differentiator, which will remain over the coming decades.”
With its lower carbon output, efficiency and flexibility, gas will be the largest growth area in the traditional energy arena over the next couple of decades, according to ExxonMobil analysts.
“Not only will energy demand be much larger in 2030 than it is today, the mix of fuels used to meet that demand will change as well,” Walters said. “Gas in particular will play an increasingly important role in meeting the world’s future energy needs, growing at 1.8 percent over the 2005 to 2030 period.”
The common wisdom is that LNG demand will double from today’s levels by 2020, hitting 400 million metric tons a year by then. Common wisdom, of course, can be wrong.
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