The Rising Influence of Rising Affluence

[DewDiligence]

Gorgon Could Remake NG Into a Global Market

[The above header is mine, but it’s the crux of this article from Friday’s WSJ.
Notably, the price of Gorgon LNG in the long-term supply deals recently inked by the Big-3 (CVX, XOM, and RDS-A) is linked to the world price of oil.]

http://online.wsj.com/article/SB125256295512998675.html

›Gorgon's Fate Takes Shape

By BEN CASSELMAN, PATRICK BARTA and ROSS KELLY
SEPTEMBER 11, 2009

A huge project to tap natural-gas reserves in a remote corner of Australia promises to cement the nation's status as a major energy producer and underscore Asia's emergence as the key growth market for the oil-and-gas industry.

Chevron Corp. and its partners, Exxon Mobil Corp. and Royal Dutch Shell PLC, will announce within days that they have given final approval to the project after years of delays, people in the industry say. The project will produce gas from fields off the Australian coast, super-cool it to convert it to a liquid, and ship it to customers around the world.

The decision to go ahead with the project, known as Gorgon after the offshore field where the gas will be produced, highlights how energy companies are counting on rebounding demand from Asia to lift their fortunes as the recession has cooled the global thirst for oil and gas.

Even by the standards of Big Oil, Gorgon is huge. The project will tap into 40 trillion cubic feet of gas, the equivalent of 6.7 billion barrels of oil. The companies have declined to discuss the price of the project, but government and independent experts have estimated the total cost to bring the project into production could amount to more than $40 billion, making it one of the world's most expensive energy projects.

Gorgon is expected to deliver its first gas shipment in 2014, more than 30 years after the field was discovered.

The new supplies from Gorgon and other projects in Australia could lead to a fundamental shift in the way gas is priced throughout the world. As more natural gas travels by free-ranging ships rather than immovable pipelines, traditional regional price differences could begin to erode as big buyers such as China gain more power to negotiate prices by playing competing suppliers against each other.

"We're seeing the first stages of what will ultimately be a more global natural gas market," said Mark Gilman, an analyst with Benchmark Capital in New York.

To win Australian government approval, Chevron, as the project leader, had to leap several environmental hurdles, including providing safeguards for a rare species of carnivorous turtle that populates the island where one of the project's key facilities will be located.

For Australia, Gorgon is the first in a wave of projects. Now the world's sixth-largest supplier of liquefied natural gas, or LNG, Australia could leap to No. 1 by 2020, as a key supplier to China and other emerging Asian powers.

More than a dozen major LNG projects are slated for startup along Australian shores and in neighboring Papua New Guinea by 2014 or 2015.

Risks remain. Several recent LNG projects have been delayed by technical problems and cost overruns. If Gorgon encounters further problems, it could eat into profit margins.

These projects are also moving forward at a time when the global recession has driven natural-gas prices to their lowest point in years. Australian gas exporters have seen their prices fall more than 50% from December. On Thursday, natural-gas futures in New York soared 15% but are still sharply lower for the past year. Oil prices, which more directly influence LNG prices, rose 0.88% to $71.94, up 61% on the year.

But Asian demand is expected to grow rapidly when the economy recovers, while traditional suppliers of LNG, such as Indonesia and Malaysia, are struggling to find new supplies. That's led to an explosion of competition to supply the Asian market. Qatar and Russia are also looking to sell more gas to Asia, and a Canadian company is planning to build a terminal to ship LNG to Asia from British Columbia.

Some experts warn the rush of new supply could ultimately drive down prices. So companies are racing to get their projects approved and in production as quickly as possible to lock customers into supply contracts.

Chevron, Exxon and Shell have already agreed to sell most of their Gorgon gas through long-term contracts that link the price of the gas to the price of oil. But if a glut in supplies leads to a decline in prices, customers could seek to renegotiate their deals. Chevron said its contracts are binding.‹