Weekly Oil & Gas Notes: Exxon Mobil And Chevron

This week saw quite a few developments in the oil and gas space. Exxon Mobil (NYSE:XOM) announced that its liquified natural gas (LNG) project in Papua New Guinea (PNG) is on track for its first delivery next year and that it is advancing on expansion opportunities in the region. The project is important for Exxon because of its lower costs, high quality resource base and significant scalability. Also, Chevron (NYSE:CVX) won a tender to explore for shale gas in Lithuania. However, based on the results of shale gas exploration in Poland so far and the EIA estimates of technically recoverable shale gas reserves in the country, we are not very optimistic about the commercial viability of shale gas reserves in the region.

Exxon’s PNG LNG Project On Track

Exxon announced that its LNG project in PNG is 90% complete and is on track to deliver first cargo of LNG in the second half of 2014. It is an important project for the company as it focuses on boosting its liquids and liquids-linked production volume amid lower natural gas prices in North America. The PNG LNG project is expected to boost Exxon’s net annual production volume by more than 21 million BOE at its peak. (See: Exxon’s Papua New Guinea LNG Project Is On Track For Its First Delivery)

Exxon holds a 33% operating stake in the $19 billion project that boasts of a substantial certified reserves base with a high liquids (crude oil and natural gas liquids) content and minimal impurities. Higher liquids content boosts revenues as oil companies earn more revenues per barrel of oil equivalent (BOE) on selling liquids rather than natural gas. Exxon’s consolidated subsidiaries sold liquids at an average price of over $100 per barrel in 2012, while the company realized average price of just over $23 per BOE of natural gas. ^[1] Moreover, lower impurities and the existing onshore infrastructure base from oil field development projects in the area also reduce the project’s operating costs. Proximity to the Asian markets, which is expected to drive most of the growth in future energy demand, makes the project even more attractive due to lower transportation costs.

Because of these advantages, Exxon is looking to lock natural gas reserves for expansion of the LNG facility in PNG. During the second quarter earnings conference call, the company executives said that they are considering expansion opportunities for the project including ongoing negotiations with InterOil Corporation and Pacific LNG for the Elk-Antelope resource. If the deal with InterOil goes through, Exxon and its partners can potentially add another LNG train at the PNG facility, which will further reduce per unit costs of the project.

Chevron’s New Exploration Contract

Earlier this week, Chevron won a tender to explore for shale gas in the 1,800 square kilometre Silute-Taurage prospect in western Lithuania. The company entered the North European country last year with the acquisition of a 50% stake in a local company, LL Investicijos. Currently Lithuania is completely dependent on Russia for its energy requirements and has been involved in a tussle with Russian gas giant Gazprom over gas pricing. Therefore, the country hopes to reduce its dependency on Russia by developing its shale gas resources. ^[2]

However, the results of the Polish shale gas exploration in the Baltic region, which is the most prospective region for shale gas in the EU, have not been encouraging so far. Poland has seen international oil companies such as Exxon Mobil, Marathon Oil and Talisman Energy pulling out of the exploration program this year on unimpressive results. ^[3] Additionally, the EIA significantly lowered its estimates for the amount of technically recoverable shale gas in Lithuania this year. The EIA currently estimates Lithuania’s total technically recoverable shale gas reserves at just over 11 billion cubic metres (bcm), which will only last for 3 years at an annual consumption rate of 3.3 bcm seen in 2012. A couple of years back, it estimated the country’s shale gas reserves to cover over 30 years of demand. We therefore do not expect Chevron to strike a significant commercially viable shale resource in the region.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Exxon Mobil SEC Filings, sec.gov [↩]
2. Lithuania grants Chevron right to explore for shale gas, reuters.com [↩]
3. Poland’s shale gas hopes buoyed by promising test output, reuters.com [↩]