Why Exxon's Gigantic Move Is a Smart One
Satarupa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The world is shifting towards the use of greener and renewable forms of energy so that we can save the world we stay in. Natural gas, though harmful, has emerged as a much greener and less vicious form of energy in comparison to oil. And driven by this fact, the demand for natural gas is witnessing huge growth in our today’s economy.
Oil and natural gas companies are leaving no stone unturned to tap this opportunity. ExxonMobil’s (NYSE: XOM) proposal to build a floating liquid natural gas (FLNG) plant offshore Australia to tap resources offshore is a clear example.
Let’s dig into the details
Exxon, in a 50:50 joint venture with BHP Billiton, has decided to build the world’s second and biggest FLNG project. FLNG technology is used to extract and process oil from sources lying in remote areas, or having low deposits which are uneconomical to drill otherwise. The major facility of operating a FLNG is that once one area gets depleted, the facility can be moved to another area of production.
The FLNG facility will be at first set up in the Scarborough gas field, which is touted to hold around 10 trillion cubic feet of gas. The facility, set up by Exxon, is estimated to produce between six million and seven million metric tons of liquefied natural gas per year, almost double of Shell’s FLNG project in Prelude field offshore Australia.
Royal Dutch Shell (NYSE: RDS-A) was the first to introduce the idea of a FLNG back in 2011, when it set up the world’s first FLNG project in Prelude field in the Browse Basin offshore northwestern Australia. The facility is being developed with a capacity to produce 3.6 million metric tons of gas per year from a reserve of 3 trillion cubic feet of gas, with the purpose of tapping the Asian market.
Tapping the ever growing Asian market:
Japan is the largest importer of LNG in the world, and since the Fukushima Daichi incident, demand for natural gas has been increasing at a very high rate. China’s demand for natural gas is also expected to quadruple in the next 22 years .And that’s not the end of the story.
Due to this high demand, the price for LNG prevalent in Asia is almost four times that of in the U.S. These two factors make Asia the perfect target market for natural gas companies. But, such a big opportunity always attracts many players resulting in huge competition.
Chevron (NYSE: CVX) was one of the first to understand the strategic importance of Australia. The country’s geographical location near to Asian markets, and vast deposits of natural gas make it perfect for building an LNG export facility. Australia is even touted to become the largest exporter of LNG, surpassing Qatar. But, recent developments have created some doubts over the expected advantages of Australia.
North America and East Africa are developing LNG export facilities to serve the Asian markets, and a strengthening Austrian Dollar is leading to increased project costs. Chevron’s Gordon LNG project’s cost increased 20% to $54.4 billion. This is where FLNG enjoys an added advantage with no land acquisition cost, and the vessel can be built in a country with lower labor cost.
Foolish bottom line
The Australian offshore gas fields were for long known as orphaned gas, but with the introduction of technologies like used in FLNG, these vast reserves of 14 trillion cubic feet of gas can be extracted and commercialized.
With the success of such innovations in the oil and natural gas industry, at least oil will be able to nullify its biggest challenge -- to extend its field life. Let’s wait and watch, and keep a close eye on the performance of Exxon in Australia.
Satarupa Bose has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!