A Closer Look At Chevron’s Biggest Bet In The Global LNG Market

by Trefis Team
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Quick Take

  • Chevron is betting big on the global LNG market with around 25 MTPA gross capacities under construction in Australia and another 15 MTPA under consideration in Canada and Australia.
  • The Global LNG trade has been growing strongly over the past few years on rising natural gas demand from Japan, South Korea, China and other Asia-Pacific markets.
  • Chevron’s biggest bet on the LNG market, the Gorgon LNG project in Western Australia, forms a critical part of its production growth plan as well.
  • However, the project has been marred with rising labor costs, weather delays and lower than expected productivity, which is leading to higher capital expenditures by Chevron.

Chevron (NYSE:CVX) is betting big on the global Liquefied Natural Gas (LNG) market, spending billions of dollars in the construction of around 25 Million Ton Per Annum (MTPA) gross LNG capacity. Additionally, the company also started the 5.2 MTPA LNG plant at Angola this year and is also a 50% partner in the proposed Kitimat LNG project in Canada. Here, we take a closer look at Chevron’s Gorgon LNG project and what’s driving the global LNG demand.

California-based Chevron Corporation is the second largest energy company in the U.S. after Exxon Mobil. The company manages its investments in subsidiaries and affiliates, for which it provides administrative, financial, management and technological support.  This extends both to its U.S. subsidiaries, and to its international subsidiaries engaged in fully integrated petroleum, chemicals and mining operations, as well as power generation and energy services.

See Our Complete Analysis of Chevron

Whats Driving The Global LNG Demand?

The global natural gas demand is expected to grow by 64% from 113 trillion cubic feet in 2010 to 185 trillion cubic feet in 2040, primarily due to its growing use in electricity generation, industrial operations and transportation. This is partly driven by the fact that it has much lower carbon intensity compared to coal, for which it is favored by governments planning to reduce greenhouse gas emissions in several countries. The EIA estimates industrial and utilities sectors to account for 77% of the projected increase in global natural gas consumption. [1]

A strong growth outlook for global natural gas production also makes it a more competitive fuel among other energy sources in the long run. The EIA expects shale drilling in the U.S. and increased Arctic exploration in Russia to account for almost one-third of the global increase in natural gas supplies. [1]

With a rather concentrated supply growth and emerging demand from Asia-Pacific countries, the world natural gas trade, especially LNG trade, is poised to grow higher in the coming years. The share of LNG in global natural gas trade has grown steadily over the past few years from around 28% in 2008 to 32% in 2012. This is primarily due to the fact that natural gas imports by the Asia-Pacific countries that rely mostly on LNG (~80%) are growing much faster than the rest of the world. [2]

Most of the LNG demand in the Asia-Pacific region primarily hinges on two industrialized countries, Japan and South Korea. Although these two countries together account for just 5% of the global natural gas consumption, they import more than 50% of the total LNG traded worldwide. This is because of negligible domestic supply and huge demand form industrial and utilities sectors in these countries.

Since the Fukushima nuclear disaster in early 2011, LNG demand from Japan has grown rapidly, rising more than 25% from 2010 levels. We expect the amount of LNG imported by Japan to remain on the higher side in the short to medium term, as most of the nuclear reactors in the country continue to remain offline. [3] South Korea’s LNG imports are also expected to grow moderately with increasing natural gas demand from utilities and industrial sectors. [1]

However, most of the LNG demand growth in the Asia-Pacific region is expected to come from China. Government policy aimed at reducing greenhouse gas emissions to deliver cleaner economic growth is the key factor driving higher natural gas demand in the country. Although the fuel represents just around 5% of the country’s total energy consumption currently, the government expects to double it to 10% by 2020. China is not only planning to replace huge amounts of coal used in the generation of electric power with natural gas, but it also plans to replace as much as one-tenth of its oil demand by shifting toward natural gas fueled vehicles. [4] While the country is trying hard to boost its domestic gas supply through shale gas drilling, consumption is growing at such a rate that China is becoming increasingly reliant on LNG imports. Its state oil giants have also struck long-term deals with the global LNG suppliers to meet their future import needs. [5] China National Offshore Oil Corp (CNOOC) plans to double its total LNG receiving capacity to 35-40 MTPA by 2015, as it expects LNG imports to play a bigger role in meeting China’s energy needs going forward. [6]

Apart from China, other markets in the Asia-Pacific region (including Indonesia, Thailand and Singapore) are also expected to drive higher LNG demand over the longer term, as growing energy demand due to industrialization is expected to outpace domestic gas supply from aging fields. [7]

Chevron expects the global LNG demand to double by 2025, creating a supply shortfall of around 150 MTPA. This is the opportunity that it aims to tap through huge investments in LNG projects around the world. [8]

About The Gorgon LNG Project

The Gorgon project is being constructed on Barrow Island, around 60 kilometers off the northwest coast of Western Australia. It includes a three-train, 15.6 MTPA LNG facility and a domestic gas plant with the capacity to provide 300 Tera-Joules of gas per day to Western Australia. Chevron is the operator of the project with a 47.3% stake in the joint venture that also includes Australian subsidiary of Exxon Mobil (25% stake) and Shell (25% stake). Apart from this, three Japanese utilities companies that have signed long-term supply contracts with Chevron (Osaka Gas (1.25%), Tokyo Gas (1%) and Chubu Electric Power (0.417%)) are also stake holders in the project. [9]

The project will source natural gas from the Gorgon and Jansz-lo fields in the Greater Gorgon area, which holds around 40 trillion cubic feet of recoverable resource. A network of subsea and onshore pipelines would gather and transport gas form these fields to processing facilities at Barrow Island. While most of this gas would be liquefied for exports after preliminary treatment, some of it would also be supplied to mainland Australia to meet the domestic demand.

How Does The Project Impact Chevron?

Chevron expects to boost its total upstream production by more than 20% to 3,300 thousand barrels of oil equivalent per day (MBOED) in 2017 from around 2,700 MBOED in 2012. The Gorgon LNG project forms the centerpiece of this aggressive production ramp-up plan, as it is expected to contribute over 200 MBOED to Chevron’s net production volume. [10]

Not only this, the Gorgon LNG project, along with the Wheatstone LNG (which is also under construction in Australia), would make Chevron one of the top ten players in the global LNG market. It also operates the Angola LNG project, which started producing earlier this year. (See: Chevron’s Angola LNG Project Will help Slake International Gas Demand) These three projects are expected to boost Chevron’s net LNG production volume by 15 MTPA. Just to give some perspective, the global LNG market was just over 240 MTPA in 2012. Chevron also holds a 50% stake in the 5 MTPA Kitimat LNG project in Canada, which is currently in the front-end engineering and design phase. Both Australia and Canada have a location advantage in terms of lower shipping costs involved in delivering the gas to Japan, South Korea and other Asia-Pacific markets. Chevron is positioned well to take advantage of the growing LNG demand from these markets.

However, cost overruns and start-up delays weigh on the potential rate of return from the Gorgon Project. Last year, Chevron announced a sharp $15 billion or a 40% spike in the total cost estimate for the project from $37 billion in 2009 to $52 billion. This was primarily due to rising labor costs, a stronger Australian dollar, productivity issues at the Barrow Island site, and weather delays. [11]

Chevron’s net capital expenditures have increased from around $17 billion in 2009 to over $28 billion in 2012, and the Gorgon project is still just 70% complete, with first LNG cargo expected in early 2015. For the first nine months of the year, Chevron’s capital expenditures soared to $26.4 billion, while its cash flow from operations stood at just $24.6 billion during the same period. [12]

Recently, Chevron also pointed out that the elevated cost structure in Western Australia has forced the joint venture to reassess the economic viability of the fourth LNG train despite significant brownfield advantages associated with it. [13] This reflects further cost escalation at the Gorgon project. We therefore expect Chevron’s net annual capital expenditures to grow further in the short to medium term before stabilizing in the long run.

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  1. Natural gas Outlook 2013, eia.gov [] [] []
  2. Statistical Review of World Energy 2013, bp.com []
  3. Japan’s Only Working Nuclear Reactor Goes Offline For Checkup, wsj.com []
  4. China’s Natural Gas Drive may Cut Oil Demand By A Tenth, reuters.com []
  5. Global LNG, ey.com []
  6. China’s CNOOC Plans To Double LNG Import Capacity By 2015, reuters.com []
  7. SE Asia To Drive LNG Demand Moving Towards 2025, rigzone.com []
  8. 3Q 2013 Chevron Earnings Conference Call, chevron.com []
  9. Gorgon Overview, chevron.com []
  10. Chevron Reaffirms 2017 Production Target, Highlights Future Growth, chevron.com []
  11. Gorgon LNG Costs Blown Out To $52 Billion, afr.com []
  12. Chevron SEC Filings, sec.gov []
  13. Chevron doubtful about fourth train for Gorgon LNG project, ogj.com []
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