Producers no strangers to LNG projects

Major Alaska North Slope companies — BP, ConocoPhillips, ExxonMobil — have substantial liquefied natural gas investments worldwide

Bill White

Researcher/writer for the Office of the Federal Coordinator

The big three North Slope oil and gas producers working toward a multibillion-dollar Alaska liquefied natural gas export project have substantial LNG investments across the globe. In some cases these investments go back decades.

Taken together, ExxonMobil, BP and ConocoPhillips own stakes in LNG production plants in the Middle East, Southeast Asia, Australia, Africa, the Caribbean and North America.

In addition, ExxonMobil owns an interest in two of the dozen or so plants under construction worldwide, while ConocoPhillips has a piece of a third project.

Each company also is in the LNG importing business — investors in terminals where liquid methane can be received, stored, warmed back into a vapor then routed into the gas pipeline grid. ExxonMobil in Texas, the United Kingdom and Italy; ConocoPhillips in Texas; and BP in China — the only Western oil company with such an investment in China.

ConocoPhillips has a third LNG enterprise the other two companies lack in their portfolios: It owns one of the muscular liquefaction technologies that superchills methane to minus 260 degrees, compressing the gas into a liquid that’s more cost-effective to ship long distances. ConocoPhillips debuted its technology at its Nikiski, Alaska, LNG plant in 1969, and the process is running at five other plants from Point Fortin, Trinidad, to Darwin, Australia. Four LNG plants under construction worldwide will use it as well.

Though a hot energy commodity these days, LNG is a side dish on the menu of activities these three petroleum companies are engaged in worldwide.

In the companies’ annual reports, the LNG financials are too small within their global operations to earn a dedicated line on the corporate income statements. However, in the text, LNG merits mention as drawing investment capital as well as one of the many possible growth areas in the companies’ portfolios.

LNG production is a business dominated by major multinational petroleum companies like these three Alaska operators, and by national oil companies in such countries as Qatar, Indonesia, Malaysia, Nigeria and Algeria.

Among the multinationals, Shell is an even bigger global LNG player than the three Alaska North Slope operators. Shell makes LNG in Brunei, Malaysia, Australia, Russia, Qatar, Oman and Nigeria, with Trinidad and Tobago as well as Peru coming soon when Shell closes its purchase of Spanish oil company Repsol’s interest in the plants there.

Other major international oil and gas companies with substantial investments in LNG plants include Chevron (United States), Total (France), Eni (Italy), Statoil (Norway) and INPEX (Japan).

The qualities needed to shine in the LNG industry are the very same traits that oil wildcatters need to grow into global petroleum producers:

•The patient endurance of a long-distance runner.

•Access to bales of money, through both strong cash flow and stellar creditworthiness.

•A risk-taking DNA.

Tackling LNG investments can entail vast scales of time, cost and risk.

On time, Joseph C. Geagea, president of Chevron Gas and Midstream, put it this way at a Tokyo LNG conference in September 2013: On average, a project takes 18 years from gas discovery to the first LNG shipment setting sail for market.

On cost, a typical project will cost billions of dollars, even tens of billions, not counting the expense of building out the production fields that will feed natural gas to the plant. LNG developments are among the most costly capital projects a petroleum company will undertake. And lately, particularly for the eight projects under construction in Australia and Papua New Guinea, the price tag has been soaring.

The cost of building an LNG plant doubled from the early 2000s to today, said consultants PFC Energy during an Alaska seminar in August 2013. The cost of developing gas fields to support the liquefaction plants also has jumped, PFC Energy said.

On risk, where to start. Here’s a sample:

•Risks of lengthy development — including years before any positive cash flow as well as potential political, regulatory and litigation snags.

•Risks of a long construction period — including cost overruns, weather delays, labor problems and, again, litigation. What if the timing gets mismatched for different components of the development, such as the gas fields are ready but the LNG plant isn’t, or tankers launch from the shipyard before the LNG plant is done?

•Technology risks — glitch-prone equipment that delays startup, hampers production or causes contracted deliveries to be missed.

•Price risks — the LNG is pegged to a price index that doesn’t support the cost of production, or markets change during the multiyear development and construction.

Let’s look at the global LNG investments of ExxonMobil, BP and ConocoPhillips, the three companies considering the Alaska LNG project with their partner, Canadian pipeline firm TransCanada, which has no liquefaction investments.

Their early concept envisions a $45 billion to $65 billion project that includes a gas treatment plant on Alaska’s North Slope, a roughly 800-mile pipeline, and a liquefaction plant with LNG storage and a two-berth tanker terminal at Nikiski in Southcentral Alaska.

The export plant would have the capacity to make 15 million to 18 million metric tons of LNG annually, the equivalent of 2 billion to 2.4 billion cubic feet a day of gas.

This would be massive undertaking for the three producers.

ExxonMobil and BP are part owners of larger LNG plants, although those plants scaled up over time. ExxonMobil is investing in a similar-sized project called Gorgon under construction in Australia right now. ConocoPhillips, the smallest of the three, has no other LNG projects in its portfolio on the same scale as Alaska LNG.

In all, the three companies own stakes in more than 40 percent of the LNG production trains operating worldwide today — a typical LNG plant features several LNG trains running side by side, each liquefying methane independent of each other.

Because almost all of those investments involve minority interests in the trains, the companies’ actual share of today’s global LNG plant nameplate capacity totals about 13 percent.

In the 1980s and 1990s, Qatar’s leaders decided the Mideast nation’s ownership of the spectacular North Field — the world’s largest dry-gas field — would become a cornerstone of their 21st century economy.

LNG exports became the means, and ExxonMobil became the biggest outside investor propelling Qatar’s leap to the top among the world’s LNG makers. It owns a share in 12 of Qatar’s 14 LNG trains.

Qatar’s first LNG trains cranked up in the late 1990s.

Its 2003 production of about 14 million metric tons per year — about 2 billion cubic feet a day when warmed back into a vapor — already ranked Qatar as the fourth-largest LNG exporter in the world, behind Malaysia, Indonesia and Algeria.

By 2011, Qatar could produce 77 mtpa, more than three times No. 2 Malaysia’s output.

Exxon’s entrée into Qatar and some of its other LNG ventures came via Mobil Oil. Exxon and Mobil, two massive products of the U.S. Supreme Court breakup of Standard Oil 100 years ago, merged in 1999.

Mobil was an investor in Qatar’s first LNG plants: A 10 percent stake in Qatargas 1’s three trains and a 25 percent share of Rasgas 1’s two trains.

The investments continued after the Mobil and Exxon merger. The company has stakes in seven of the nine LNG trains Qatar commissioned since, all from 2004 through 2011. National oil company Qatar Petroleum is majority owner in each train.

ExxonMobil also has partnered with Qatar Petroleum in three LNG terminals built to import Qatari LNG. One is South Hook in Wales. A second is Adriatic LNG in Italy. The third is Golden Pass in Texas.

ExxonMobil’s only LNG plant outside of Qatar is a 30 percent interest in two trains at Indonesia’s Arun plant. Arun opened in 1978. But it is slated to stop exporting in 2014 to become an LNG import terminal for Indonesia’s growing economy.

Arun also came from the Mobil side or the company, a result of a Mobil gas discovery in 1971.

ExxonMobil is invested in two LNG plants under construction:

•It is a 41.5 percent investor and operator of PNG LNG in Papua New Guinea. The $19 billion 6.9 mtpa plant — about 920 million cubic feet a day — is expected to start up in 2014.

•It is a 25 percent investor in the Australia’s Gorgon project, led by Chevron. The $52 billion, 15.6 mtpa project — about 2.1 billion cubic feet a day — is expected to begin producing in 2015.

Both of those ventures were Mobil plays before the 1999 merger.

Part 2 of this story will appear in the Dec. 1 issue of Petroleum News. Editor’s note: This is a reprint from the Office of the Federal Coordinator, Alaska Natural Gas Transportation Projects, online at www.arcticgas.gov/north-slope-producers-no-strangers-lng-projects.