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Chevron Corporation, Royal Dutch Shell: Is the LNG Market Nearing Saturation?

 

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By Staff Writer on Sep 7, 2016 at 3:19 pm EST

In the past few years, the global energy market has undergone major changes. The usage of traditional energy resources has dropped significantly, while demand for cleaner, environmental-friendly energy sources has escalated. People are now increasingly becoming aware of the effects of greenhouse gases emissions from conventional energy sources, crude oil, and coal on our natural environment and most importantly, the ozone layer.

Last year, the Paris Agreement (COP21) was a major breakthrough for the renewable industry, as leaders from around 195 countries agreed to curb their carbon emissions. The energy producers aim to maintain the rise in global temperature to 2 degrees above pre-industrial levels in the coming few years. The agreement has provided a positive momentum to the green-tech resources as a number of international energy companies have now started to increase their exposure in the segment.

LNG: The Future of the Energy Market?

Natural gas and liquefied natural gas (LNG) are much more environmentally friendly than crude oil and coal. They are considered as the “crucial bridge fuel in the transition to a low-carbon future.” Analysts and market experts opine that the natural gas products can act as much cheaper and cleaner burning fuels for consumers ahead of the market’s shift toward renewable energy sources.

The demand for LNG has increased significantly in the past few years; the fuel now plays one of the biggest roles in the global energy mix. Royal Dutch Shell plc (ADR) (NYSE:RDS.A) expects LNG market to grow by 5% year-over-year in the next few years. The Anglo-Dutch energy giant expects global LNG demand to increase to 430 million tons per annum (mtpa), from current consumption of around 240 mtpa.

Assuming LNG demand may further increase in the coming years, many energy companies, including Shell, Exxon Mobil Corporation (NYSE:XOM) and Chevron have started allocating huge amounts of total capital expenditure (capex) to LNG projects. Chevron has two mega-LNG projects in the pipeline; Gorgon and Wheatstone LNG projects. Both projects are located in Australia and are worth billions of dollars. The Gorgon project shipped its first LNG Cargo in March, while Wheatstone LNG project is expected to commission its first cargo in mid-2017.

The Gorgon LNG Project, which is worth around $54 billion, is one the world’s leading natural gas projects. The project is estimated to have total production capacity of around 20,000 barrels of condensate per day (cpd) and around 2.6 billion cubic feet of natural gas. Chevron believes the project would act as an important pillar for the Australian economy as it would provide clean fuel for domestic and industrial use.

The San Ramon-based energy company’s second LNG project, Wheatstone, is also one of Australia’s biggest developments in the sector. Along with the Gorgon project, the $29.7 billion LNG project is expected to position Chevron Corporation (NYSE:CVX) as the biggest natural gas player in the Asia-Pacific region. The energy consultancy firm, Wood Mackenzie also expects Chevron to become the leading LNG producer in Australia from 2019.

Managing Director of Chevron Australia, Roy Krzywosinski himself said: “Together, Gorgon and Wheatstone will position Chevron as Australia’s largest LNG producer and Australia as one of the world’s largest LNG exporters.”

The two new LNG projects are expected to yield high benefits for the company as Chevron sees LNG as one of the “essential fuels for power generation across Asia.” The company believes natural gas is one of the fastest growing energy segments in the world. However, Chevron is not the only Big Oil company to spend a huge sum on natural gas projects. Shell has recently acquired London-based BG Group for around $54 billion to strengthen its foothold in the LNG market. The acquisition is expected to increase the Hague-based company’s exposure in the Australian natural gas market. Shell CEO Ben van Beurden is of the opinion that natural gas and renewable energy businesses will provide significant growth opportunities for the company beyond 2020. The CEO expects the segment to clear the company’s pathway to profitability in the long-term.

The world’s leading oil and gas producer, Exxon Mobil is also strengthening its presence in the LNG market. The company has recently entered into an acquisition agreement with InterOil Corporation to enhance its balance sheet and improve its asset portfolio. Exxon Mobil CEO and chairman, Rex W. Tillerson believes the $2.5 billion deal “will enhance ExxonMobil’s already successful business in Papua New Guinea and bolster the company’s strong position in liquefied natural gas.”

The LNG-focused Cheniere Energy, Inc. (NYSEMKT:LNG) is also working on multiple energy projects. The company has invested billions of dollars in its Sabine Pass LNG Terminal, which will be the “largest receiving and regasifying terminal” in the world. The project is expected to include six regasification facilities with a total LNG production capacity of around 27 mtpa.

Is LNG Market Over Crowded?

As a number of LNG projects are coming online, it is expected that the market will become saturated soon. Concerns over LNG oversupply have been in the market for quite some time now. On the demand side, low energy demand from China and other developing countries, weak crude oil prices and associated products, and mild winters are already affecting LNG demand worldwide.

Though a number of international oil and gas companies are increasing their operations in the LNG segment, analysts at Barclays believe the sector still has a long way to go. The sell-side firm highlighted the emergence of new LNG demand worldwide due to low LNG prices; that is, although LNG demand has dropped in Japan and South Korea in the past few quarters, a number of other countries have become net importers of LNG.

Pakistan, Jordan, Portugal, and Egypt are amongst the new importers of LNG. Collectively, they imported around 6 mtpa last year. This year, Columbia and Ghana have also emerged as new LNG importers. According to the global energy consultancy firm, WoodMac, around 60 countries are likely to become net importers of 140 mtpa of LNG in the next decade. Thus, as LNG prices are weak, a number of countries are switching from traditional energy sources to much cleaner, natural gas products.

Conclusion

Many oil and gas producers now believe natural gas and LNG are their way to move forward in the energy market. The companies are increasing their spending on LNG projects, despite low prices. The energy giants are of the opinion that LNG would yield high returns in the future. Moreover, although LNG supply is expected to increase in the coming years, demand for fuel is also responding well. Rising demand has addressed all concerns about the LNG glut in the market.

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