U.S. LNG Exports May Impact Chevron’s Australian Gas Pricing

CVX: Chevron logo

American gas companies have managed to snap up two Liquefied Natural Gas (LNG) supply contracts with Asian players over the last two months on contracts that link prices to the U.S. benchmark known as the Henry Hub. [1] Analysts at Bank of America believe that increasing gas exports from the U.S. could impact oil majors like Chevron (NYSE:CVX) that are developing multi-billion dollar LNG projects in Australia, targeting future demand from Asian countries. LNG prices in Asia are linked to crude prices. Sourcing cheaper gas from the U.S. could potentially weaken the 40 year old pricing standard in Asia, delaying LNG projects in Australia. ConocoPhillips (NYSE:COP) and Exxon Mobil (NYSE:XOM) are also involved in LNG projects to target demand from countries like Japan, China and India.

We have a $109 price estimate for Chevron, which is slightly above its current market price.

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Cheap gas

Shale exploration has dramatically increased gas production in the U.S., making it the largest producer of natural gas in the world. Excessive supply has pushed down prices to their lowest levels in ten years. The disparity between oil and gas prices widened in 2011, pushing Asian LNG customers to sign contracts with U.S. suppliers. Asia contributes to about 60% of the world’s LNG demand.  [1] Asian countries are expected to increase their demand for natural gas over the coming years as they move away from coal to reduce greenhouse emissions. Chevron has looked to benefit from this trend by undertaking the giant Wheatstone and Gorgon LNG projects in Australia.

Already affected by rising development costs, cheaper imports from the U.S. could delay the implementation of these massive Australian LNG projects by providing customers alternative options. To date, Indian player GAIL and Korea Gas have struck contracts with Cheniere Energy to import LNG from the U.S. by 2017 with prices linked to the Henry Hub along with a fixed component. [1] The contracts are subject to Cheniere getting the required approvals and financing for its proposed liquefaction facility at Sabine Pass. Analysts predict that more clients will shift to such contracts from the present system where prices are linked to crude.

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  1. Korea Gas to Buy U.S. LNG as Gas Slump Attracts Asian Importers, Bloomberg [] [] []