Monday, March 10, 2008

Chevron: New LNG Plants Could Doom Another

Ruthie Ackerman, 03.10.08, 2:28 PM ET

Soaring gas demand and rising prices have led Chevron, the U.S.'s second-largest oil and gas company, to announce the development of two multi-billion dollar gas projects in Asia. But it looks like the company may be giving one of its gas export ventures the boot in favor of another.

On Monday Chevron announced it planned to develop a liquefied natural gas export venture based on its Wheatstone field off northwestern Australia. The company said it intends to start engineering and design work for an initial 5.5 million U.S. tons-per-year natural gas facility in 2009.

But Chevron is already involved in a separate LNG venture with Royal Dutch Shell and Exxon Mobil called Gorgon that would be based on nearby Barrow Island. That venture has been delayed because of lengthy environmental approvals and cost pressures. It was originally supposed to open in 2006.

Roy Krzywosinski, the managing director of Chevron Australia, said the firm is committed to both projects, but Wall Street Access analyst Bernard Picchi isn’t so sure. In fact, Picchi sees Chevron’s development of Wheatstone as a “big blow” for Gorgon.

Picchi said the development of Gorgon has faced a slew of problems–from significant development costs to how to clean the high levels of carbon dioxide from the field. Originally, Picchi said, development costs were estimated at $5 billion. Now estimates range between $20 and $25 billion. He said that while Chevron has tried to justify the low rate of return, Exxon is very unhappy and has held off the development of Gorgon. There has also been persistent speculation of dissent among the joint venture partners as costs continue to rise.

Chevron’s move is also bad news for Sasol, South Africa’s oil, coal, and gas company. Sasol is the leader in the technology and world production of gas-to-liquids technology, which can convert natural gas into liquid fuels. For several years, Chevron and Sasol have been in discussions about a joint venture to use the Wheatstone field for a gas-to-liquid plant. Picchi says that Monday’s announcement shows that Chevron is now planning on using Wheatstone for liquefied natural gas, not gas-to-liquids. LNG projects produce gas that requires specialized handling facilities for use, while gas-to-liquids makes synthetic petroleum products similar to those created from crude oil.

Meanwhile, Chevron announced on Monday that it plans to begin construction of a $3.1 billion natural gas project in the Gulf of Thailand. The Platong Gas II development is designed to boost natural gas processing capacity by 420 million cubic feet per day, Chevron said. The company said the project has the capacity to meet 14% of Thailand's demand for natural gas.

Chevron holds a 69.8% stake in the project. Mitsui Oil Exploration owns 27.4% and PTT Exploration and Production Public holds 2.8%. Startup is scheduled for the first quarter of 2011. Chevron's shares rose 0.6%, or 53 cents, to $85.79 in afternoon trading.

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