ConocoPhillips Adds To LNG Facilities In Australia On Expected Asian Demand

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ConocoPhillips (NYSE:COP) is considering adding another liquefied natural gas (LNG) processing train to its Wickham Point facility in Darwin, according to its Australian business unit president Todd Creeger. The new LNG train is expected to handle the output from the Browse basin, where Conoco has been drilling for gas. This would also require the construction of a new pipeline to the Darwin facility from the Browse basin, because the latter is located offshore. The output is expected to be significant enough to make the construction of a new LNG train economically viable. ((ConocoPhillips ponders Darwin pipeline, Brisbane Times))

An LNG train refers to a liquefied natural gas plant’s liquefaction and purification facilities. Each LNG plant consists of one or more trains to compress natural gas into liquefied natural gas. The liquefied gas is then transported by tankers over long distances. A typical train consists of a compression area, a propane condenser area, as well as methane and ethane areas. ((LNG train, Wikipedia))

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A Primer On Bayu-Undan And The Darwin LNG Facility

According to an Australian government website, an area of the Timor Sea lying between Australia and Timor-Leste is subject to overlapping territorial claims by Australia and Timor-Leste. This area contains substantial resources of petroleum. Australia and Timor-Leste have agreed that a joint development regime, pending final delimitation of the seabed, is the best approach to permit development of petroleum resources to the benefit of both countries. This area is referred to as the Timor Sea Joint Petroleum Development Area (JPDA) where Conoco’s Bayu-Undan, a gas condensate field, is located.

The Darwin LNG facility, located at Wickham Point, Darwin, processes natural gas from the Bayu-Undan Field. The facility is authorized to process 10 million tonnes of LNG per year. Presently, the facility is meeting gross contracted sales to Tokyo Electric Power Company and Tokyo Gas Company Limited, of approximately 3 million tonnes of LNG per year. This implies significant scope for expansion, both from a layout footprint standpoint and permits. Thus far, Conoco did not have a a single gas field that could underpin the building of a second train to the facility. The Browse basin has the potential to change that. ((Australia and Timor-Leste, ConocoPhillips))

Pipeline Options

ConocoPhillips has two options for gas from the Browse basin. One option would be to build a pipeline paralleling the one built from the Ichthys field by the Japanese company Inpex. It is an 820km gas pipeline from the Browse Basin to Darwin. The other option would be for gas from its operations in the Browse Basin to flow to Bayu-Undan, 500 km away in the Timor Sea. The gas from the Browse basin could flow up to Bayu-Undan, be processed and then shipped onshore to Darwin.

Who Will Buy The Gas?

The company made no mention of potential customers for the gas to be produced from the Browse basin. We think that it is a safe bet that those customers would be Asian countries like China, Japan, and India.

Having made a policy decision to replace nuclear power with other sources of energy in wake of the Fukushima disaster, we believe that Japan will opt for LNG as one of the alternative sources. As nuclear energy gets replaced gradually, demand for LNG would increase. We think that Conoco would be well-placed to take advantage of the opportunity. The demand for gas from China is insatiable. As the country’s economy expands, demand for gas is expected to rise.

We think that Australia would be the natural choice as a supplier of the gas owing to its geographical proximity to China, as compared to suppliers like Qatar. India has also been increasing LNG imports to meet the energy demands of a fast-growing economy. With gas output from the much-hyped Krishna-Godavari basin, located on its eastern coast, not meeting expectations, it would be forced to import more.

Selling gas is much more profitable in international markets, as compared to in the U.S., as the latter is currently awash with gas and prices are very low. The same is not true of international markets, where demand is very robust. Conoco, therefore, would like to tap into this opportunity and has been doing so for quite some time now. There is a vast gulf between realized prices for its international and North American gas businesses. In Q2 2012, the average realized price for natural gas in the international segment was $11.69/Mcf (1 Mcf = 1,000 cubic feet) while that for the North American market was $1.93/Mcf. The international gas business constitutes 20% of Conoco’s overall natural gas business. [1]

The natural gas business accounts for 15% of the Trefis price estimate for ConocoPhillips.

We recently revised the Trefis price estimate for ConocoPhillips to $60 which is in line with its market price.

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Notes:
  1. Q2 2012 Earnings Conference Call Presentation, ConocoPhillips []
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