Chevron (NYSE: CVX) Australian LNG Investing

Cost Setbacks Arise


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By Justin Williams
Thursday, May 30th, 2013

Chevron Corporation (NYSE: CVX) is in full swing to develop its Australian liquefied natural gas projects despite ongoing concerns.

Costs keep going up, but Chevron, the second largest U.S. oil company, doesn’t seem to blink an eye.

It has two Australia projects prepared for expansion: the Gorgon LNG development and the Wheatstone LNG plant.

LNG terminalThe Gorgon LNG development, located on the Australian Barrow Island nature reserve off the northwest coast, is rounding 60 percent completion, and Chevron is already in the engineering and design phase of expanding the project by year end.

Upon completion, the Gorgon will have a maximum capacity of 15.6 million tons of LNG per year and, according to plan, is on schedule to make its first shipments of LNG cargo by early 2015 after a 2014 start-up.

If it expands, which is probable, another 5.2 million tons of capacity would be added every year, producing a grand total of 20.8 million tons of Australian LNG.

The Wheatstone LNG plant is currently only about 10 percent completed, and it is also looking to make a sizable expansion. Chevron is presently in talks with third-party gas suppliers to boost its capacity.

As it stands now, the plant would have a capacity of 8.9 million tons once the $29 billion project is complete.

And here's the kicker – if Chevron can secure a third-party partnership, it hopes to take full advantage of the Australian government’s approval that allows the site to become a 25 million-ton maximum capacity plant.

Wheatstone is scheduled to ship its first cargo in 2016.

Chevron recognizes the growing need for LNG around the world, and because the U.S. is so reluctant to export its own supply of natural gas at the moment, its Australian assets are pivotal in its positioning as a leading LNG supplier.

It’s hard to say what the U.S. will do in the future, but Australia is a safe bet now.

Australian LNG Costs

However, Australian production is costly. Even for a company as large as Chevron, some of the planning could be diverted as a result of Australia’s high cost structure; at the very least, it needs to be managed carefully.

The Australian government is fully aware of the potential natural gas and LNG in particular holds for world markets, and it plans on milking it for all it’s worth. The LNG industry is already a $190 billion industry, and that number is only rising.

But high costs can be discouraging. Just last month, Woodside Petroleum (ASX: WPL) closed the doors on a $45 billion LNG project in Western Australia. It’s instead looking offshore, where development is more economical.

The Gorgon, which is set to be Australia’s largest resources project ever, has already seen a 40 percent hike in project costs overall, growing to a $50 billion endeavor.

These costs stem from gains in Australian currency, the rising expense of labor, and the general construction costs to support large-scale projects like Chevron’s.

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Full Steam Ahead

But Chevron, despite facing the adversity of rising costs, has a plan.

Presently, it only has 65 percent of its LNG sold under long-term contracts – less than the 80 to 90 percent a typical LNG producer would strive for in a project like the Gorgon.

But the lower-than-usual sales figures don’t deter Chevron, and the company remains confident in finding a buyer. It's talking with customers as we speak.

Chevron’s Australia Managing Director Roy Krzywosinski told reporters, according to a Bloomberg report:

“We’re in active discussions with customers. The closer we get to first LNG the more valuable the volumes are going to be. We’re confident we’re going to be able to market those incremental volumes.”

But nothing is cut and dry. There is still the pressing issue of structural costs – a lot of construction is still left to be done. A company like Chevron, with a diverse portfolio, needs to evaluate its decisions carefully.

But upon solidifying future buyers under long-term contracts, it looks like Chevron will be establishing itself as the number one supplier of Australian LNG.

The Wheatstone project, while still in its infantile stages of construction, is on budget and should launch by its planned schedule date.

From the outside looking in, Chevron is dead set on Australian LNG, and nothing is going to stand in its way.

They have the gas. Now it’s time to see how the investment climate will react.

 

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