Chevron’s $29 Billion Australian LNG Project is a Big Bet on Asian Demand

by Trefis Team
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Energy major Chevron (NYSE:CVX) announced that it will go ahead with the $29 billion Wheatstone gas export project along with partners Apache, Kuwait Foreign Petroleum Exploration and Royal Dutch Shell. Chevron will own a 73.6% stake in the project that is expected to start shipping in 2016 and will eventually have capacity of 23 million metric tons per year. [1] [2] The deal underlines the growing interest of oil & gas firms in Australia’s natural gas reserves that are well positioned to supply to expanding markets in Asia. Chevron expects to sell 90% of the gas from the Wheatstone project through long-term contracts to players such as Tokyo Electric Power and Kyushu Electric Power. Exxon Mobil (NYSE:XOM), BP (NYSE:BP), ConocoPhillips (NYSE:COP) and Anadarko Petroleum (NYSE:APC) are some of the other major players in the natural gas market.

We have a $104 price estimate for Chevron, which is about 5% above its current market price.

Chevron doubles its bets on Asia

Chevron now holds more than half of its 150 trillion cubic feet of global gas reserves in the Asia Pacific region. [1] The Wheatstone project represents the company’s bullish view on demand for liquefied natural gas (LNG) from Asian markets such as Japan, South Korea and China. The natural gas reserves of Australia’s northern coast will see investments of more than $120 billion by international oil & gas firms and the country is expected to overtake Qatar as the largest exporter of LNG by 2021. Shipping LNG from Australia is cheaper than shipping it from the Middle East and Africa for customers in North Asian countries like Japan.

We discussed the growing demand for natural gas in Asia in our previous article – Abundant US Natural Gas Supply Slakes Asian Demand

Some analysts, however, point out that the rapid expansion of oil & gas companies in Australia has a downside risk. China, which is one of the fastest growing markets for LNG, is looking to open its shale reserves for exploration and has already held a round of auction for its shale gas blocks. [1] Shale gas exploration in the U.S. has resulted in a supply glut in the market and has suppressed natural gas prices for the past few years. China holds the world’s largest reserves of shale gas according to the EIA. Successful replication of the shale gas revolution in the U.S. could considerably lower gas prices in the Asian markets.

Cost increases are a lingering threat

The massive pipeline of projects to develop natural gas resources in Australia could also result in cost escalations for exploration firms. [3] A shortage of skilled labor and a strengthening Australian dollar may push up project costs for Chevron, which is already nearing 30% completion of its $37 billion Gorgon LNG project in Western Australia and will begin work on the Wheatstone project soon. As of now the company does not forecast any cost increase because of manpower shortages for the Gorgon project. However the strengthening Australian dollar could impact project costs as Chevron estimates that 50% of the cost of the Wheatstone project will be incurred in Australian dollars.

Click here for our full analysis of Chevron.

Notes:
  1. Chevron, Partners Approve $29 Billion LNG Project, The Wall Street Journal [] [] []
  2. Chevron approves $29 billion Aussie LNG project, Associated Press []
  3. Chevron sees no cost increase at $37 bln Gorgon LNG, Reuters []
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