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'Threat' to World Energy Without LNG Exports, Says Chevron Exec

The global markets need more natural gas than ever before, which requires more liquefied natural gas (LNG) exports from well supplied countries like Canada and the United States, Chevron Corp.'s gas and midstream chief said Friday.

Joe Geagea, president of the unit, shared a microphone with executives to discuss the oil major's third quarter results. He offered details on Chevron's LNG projects around the world, including Gorgon and Wheatstone in Australia, now being constructed, and Kitimat LNG in British Columbia (BC), which remains in the pre-construction phase. It has other LNG projects in other overseas markets as well, projects that if they all move to final investment decision (FID) are intended to strengthen the San Ramon, CA-based major's hold on world gas markets and lift it into the company of Qatar Petroleum Corp., Royal Dutch Shell plc and ExxonMobil Corp.

Chevron's world energy forecast calls for total demand to increase about 30% by 2025 from today's levels, Geagea said. "Natural gas demand is projected to grow even more, by about 40% by 2025. And LNG demand growth is expected to be even greater...LNG demand has already doubled since 2000 and it is predicted to double again by 2025. Meeting this demand would require three elements: maintaining the reliability of the existing supply, delivering current LNG projects under construction and investing in the construction of new LNG capacity."

Even if the first elements are in hand, he said, it still leaves an opportunity for about 150 million metric tons a year of new LNG projects to be sanctioned.

"Now my buyers are counting on the United States to make up the shortfall with pricing linked to Henry Hub. Even if you believe the most optimistic predictions of new U.S. supply available for export, there are still projected shortfalls of more than 50 million metric tons in 2025, and more reasonable predictions of U.S. exports suggest a gap of around 100 million metric tons in 2025...So the U.S. alone will not bridge this forecast demand supply gap...We believe new supply needs to come from multiple sources..."

The last 35 LNG projects developed globally, he said, took on average more than 16 years to deliver LNG to market. Completion times are improving, but additional capacity utilization rates for LNG facilities in production has only been averaging about 85% in recent years, Geagea said.

"Geopolitical instability, resource availability and unplanned turnaround have resulted, on average, in roughly 35 million metric tons of the existing nameplate capacity being unavailable at any given time. We have seen growth in global energy trading and expect that interregional trade of LNG will continue to increase, [but] global gas markets will remain regionally distinct over the medium to long term."

"Many analysts have forecast that U.S. LNG exports could reach about 50 million metric tons a year by 2025, or equivalent to around 11% of the world's LNG demand and about 8% of domestic U.S. gas demand," said Geagea. "At these levels, U.S. LNG exports would only represent the small share of the global LNG market."

U.S. LNG costs likely will rise as more projects compete for resources, such as engineering contractors, fabrication yard space and project financing, said Geagea. There's also growing gas demand in the United States for petrochemical projects, power plants, exports to Mexico and a transportation segment -- new demand pulling on the same supply base.

"Coupled with weather and storage effects, this could easily increase price strength and volatility for the Henry Hub," he said. "In order to ensure that sufficient supplies do get developed there needs to be cooperation alignment and understanding between LNG buyers and suppliers.” He advised buyers should diversify energy mix, maintain a geographically diverse LNG portfolio, and take equity positions in LNG projects to ensure the right projects are built in the right places for the right price.

Management believes it's prudent to leave about 25% of LNG volumes on the spot market for operational flexibility but at individual project levels, the ratio may vary. For as-yet unsanctioned projects like Kitimat, Chevron envisions that about 70% of the gas would be committed under long-term contracts by the time it reaches FID.

Geagea was asked if he saw any stress on the supply side that possibly could disrupt the potential long-term economics for LNG proposals now on the drawing board.

"In fact, I see the threat in the opposite direction," he said. "I see the threat as the longer it's taking us to enable a project to reach FID, and you fast forward it four to five years, how long it takes to build them, this market can only go up...We need to enable supply to come to the market because we have not seen anything on the demand side that is managing that carefully...

“We've got to crack this equation both from the supply side and the demand side, and the longer we see projects delayed from reaching FID, I think the price equation gets more difficult."

Chevron Canada Ltd. last February completed a transaction with Apache Canada Ltd. giving it a half-stake in the coastal Kitimat plant, the Pacific Trails Pipeline and 644,000 gross undeveloped acres in the gassy Horn River and Liard basins (see Daily GPI, Feb. 12). Kitimat LNG received the first export license from the National Energy Board to carry the equivalent of about 750 MMcf/d; plans are to issue the FID in 2014, once customers and contracts are secured. Chevron also continues to look for equity partners that might be interested in sending supplies to Asia Pacific markets, as it has for more than a year, Geagea said.

"We have not put any number out there" regarding equity interest," he said. "Obviously, it's up to the buyer also to indicate interest. We kind of like a number in our mind in terms of what we end up with, but it's really a function of where the buyers are. We're flexible, and remember we've got a partner as well and we got to consult with [Apache] in terms of where they like to end up."

Chevron's U.S. net natural gas production in 3Q2013 was higher year/year at 1.242 Bcf/d from 1.184 Bcf/d. Domestic liquids output also rose to 448,000 b/d from 440,000 b/d. Total output in the United States was 655,000 boe/d from 637,000 boe/d. Average realizations for U.S. gas was $3.23/Mcf in the latest period, versus $2.64 a year earlier. Net earnings came in at $5.0 billion ($2.57/share) in 3Q2013, weighted down by lower refining and marketing earnings. A year earlier, Chevron earned $5.3 billion ($2.69). Sales and other operating revenues were up slightly in the latest period at $57 billion from $56 million. U.S. upstream earnings were $1.016 billion, down from $1.12 billion in 3Q2012.

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