(CVX) Liquified Natural Gas Makes It A Really G’Day, Mate

September 17th, 2009

by Tony Daltorio, Investment U Research

They don’t call Australia the lucky country for nothing.

It must be luck to have such abundant amounts of energy, metals, minerals and agricultural commodities, not to mention residing so close to China and India, two countries with large populations and a seemingly insatiable appetite for such natural resources.

And that luck shows again in the recently approved, multi-billion dollar, Gorgon liquefied natural gas (LNG) project, which is spreading good fortune to the foreign companies involved in the venture and the investors who know that Australia is where it’s at…

Australia currently has the 14th largest known gas reserve in the world, and many expect it to make the world’s top ten list in that category sooner than later. Dr. Graeme Behtune, the director of research firm Energy Quest, estimates the country’s gas reserves at approximately 200 trillion cubic feet of gas.

But Australia’s ambitions lie even deeper. By the end of the next decade, they hope to dethrone Qatar as the world’s largest LNG producer. While it builds accordingly to achieve that, the government has set smaller goals along the way, including producing 60 million tons of LNG per year for export… a thirty million ton increase from current production levels and over half of the current global production of 175 million tons.

Currently, there are about 10 major LNG projects going on in Australia right now, all of which work to super-cool natural gas for liquification and transportation to far-flung markets.

Woodside Petroleum, which heads up one such business called the Pluto project, recently stated it would triple production in that plant alone by 2014, therefore putting it ahead of the Gorgon project.

Along with those major ventures in western Australia, there are three other major areas of LNG development in Australia: the Browse Basin off the Kimberley coast, Darwin beneath the Timor Sea, and Gladstone in Queensland, which extracts coal-seam methane gas.

The Gorgon Project

Gorgon’s network of fields could hold as much as 50,000 billion cubic feet of gas, and the ambitious 40-year project expects to produce 15 million tons a year, an amount equal to 8 percent of current global capacity.

Not surprisingly, it’s already attracted ready and eager buyers. China’s largest energy company, PetroChina, already agreed to buy $41 billion worth of Gorgon LNG over a 20-year time period… on top of a $25 billion deal of imports to India over a 20 year period. Several Japanese utilities have also agreed to purchase LNG from Gorgon.

Now it’s important to recognize that the Gorgon project requires a lot of investment capital and new technologies, as well as a significant degree of creativity directed at stopping the project from encroaching on the wider environment of Barrow Island.

To put that into perspective, Barrow Island consists of about 80 square miles some 30 miles off the northwest coast of Australia. And not only does Barrow Island sit on top of a huge supply of natural gas but it is one of the world’s havens for protected animal and plants species, such as the flatback turtle.

But on the plus side, Australia is politically and economically stable and has lots of natural gas which it can convert into LNG, with neighboring Asia eager to buy its gas.

Where there’s a will – and such eager consumers – there’s a way.

Three Ways to Profit from the Gorgon Project

The Australian government’s approval for the Gorgon project may turn out to be one of the most significant events of the year for three of the world’s biggest energy companies:

Chevron (NYSE: CVX), which owns 50% of the reserve,
ExxonMobil (NYSE: XOM),
And Royal Dutch Shell (NYSE: RDSB), which each hold 25%.

Investors can contrast Gorgon – a world-class energy asset located in a stable, developed country – to most other major energy projects today, where oil companies face everything from random changes in contracts terms to seized assets and kidnappings.

The investment in new technologies may be costly for the three companies involved in the Gorgon project at first, yet the good news is not only that they can afford it, but also that once they come up with a viable solution, they’ll have a competitive edge elsewhere.

Even for these three companies with a combined market capitalization of more than $600 billion, Gorgon is a large enough project to make a material difference.

For Chevron and its investors, it recalibrates the company’s entire global portfolio, positioning a major part of it in a stable Western country.

Royal Dutch Shell and its investors benefit directly, the Gorgon project confirms the company’s position as a leader in Asian LNG, along with its other LNG projects in Malaysia, Brunei and far eastern Russia.

Meanwhile, ExxonMobil and its investors, get much-needed geographic diversity for their LNG division, since most of the company’s LNG production currently takes place within Qatar.

And all three companies can now book Gorgon’s reserves in filings with the SEC.

Needless to say, at a time when the oil industry is struggling to increase its resource base in any way possible, this should provide investors – particularly Chevron investors – additional confidence in their long-term prospects.

Good investing,

Tony Daltorio

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