Chevron and Partners Approve Wheatstone LNG Project
Chevron Corp. and partners placed a US$29 billion bet on Asian demand for clean-burning fuels Monday by approving construction of the Wheatstone gas-export project in Australia, overlooking near-term worries about the global economy and competitive threats posed by new energy sources such as shale gas.
Chevron said it aims to ship the first cargo of liquefied natural gas, or LNG, from Wheatstone on the coast of Western Australia state to Japanese customers in 2016 and the facility could more than double in size later to satisfy regional energy consumption growth.
"At this point we've actually become slightly more bullish on gas demand coming out of Asia," George Kirkland, Chevron's vice-chairman, said in an interview.
This partly reflects expectations Japan will import more LNG as it seeks alternative fuels to nuclear power in the wake of the crisis around its quake-hit Fukushima Daiichi reactors, he said.
Wheatstone's approval means international energy companies have now committed to spend more than US$120 billion to develop reserves of natural gas held off Australia's northern coast and trapped stores of methane in eastern Queensland state's coal seams, moves that could catapult the country ahead of Qatar as the world's largest exporter of LNG within a decade.
The investment boom in Australia underscores the difficulties that Western companies face in accessing resources in places such as Iran and the Persian Gulf, which are off-limits to foreign investors. Buying LNG from Australia is also cheaper for North Asian countries than shipping in gas supplies from the Middle East, Africa and the Caribbean.
However, the huge scale of investment in Australian resources carries several risks, such as worsening inflationary pressures by driving up wages of workers and prices of equipment. Safeguarding against delays and budget overruns has proved challenging so far, as exemplified by a 900 million Australian dollar (US$880.5 million) cost blowout at Woodside Petroleum Ltd.'s flagship Pluto LNG project this year.
Mr. Kirkland said he didn't see any significant bottlenecks at this point in time, although the availability of skilled labor was a concern as Wheatstone competes with Australia's other LNG developments and big mining-sector expansions.
"There is no doubt that the strength of the Australian dollar has increased the cost in U.S. dollar terms," said Mr. Kirkland, while acknowledging the 5% fall in the Australian dollar-U.S. dollar exchange rate since Sept. 22. "We are presently estimating that about 50% of the cost of this project is in Australian dollars," he said.
Chevron proposes to build the Wheatstone facility in stages, with a maximum annual output capacity of 25 million metric tons of LNG. The foundation phase of the project near the town of Onslow will consist of two processing units, known as trains, with a combined capacity of 8.9 million tons of LNG a year, and a domestic gas plant.
"The benefits flowing from the Wheatstone project will be felt right across the country with the contribution it will make to jobs, government revenues, export incomes and spending on Australian goods and services," said Martin Ferguson, Australia's energy and resources minister.
Chevron will operate Wheatstone and own a 73.6% interest in the first stage of the project, with Apache Corp., Kuwait Foreign Petroleum Exploration Co., and Royal Dutch Shell also holding significant stakes.
The project marks the continued drive by Chevron to focus more on rapidly industrializing Asia and less on Europe and North America, where economic growth and energy demand is stagnating. Wheatstone is Chevron's second major Australian LNG project, after the A$43 billion Gorgon development, and the company holds more than half its 150 trillion cubic feet of global gas reserves in the Asian-Pacific region.
However, gas exporters are vying for Asian customers at a time when countries like China are looking to replicate the shale gas boom in the U.S., where the unconventional fuel accounts for nearly a quarter of domestic gas output. China, which held its first auction of shale gas blocks in June, holds the world's largest technically recoverable shale gas reserves at 1,275 trillion cubic feet, according to the U.S. Energy Information Administration.
Chevron and its partners in Wheatstone have signed binding agreements to sell 3.1 million tons of LNG annually to Tokyo Electric Power Co. and 800,000 tons of LNG a year to Kyushu Electric Power Co., including an equity entitlement in the project, for up to 20 years.
Chevron and Tepco remain in talks over the possible purchase of an equity stake in Wheatstone, which would mean the venture has committed roughly 60% of first-phase output.
But an initial deal struck by the Wheatstone venture in July last year to sell 1.5 million tons of LNG annually to Korea Gas Corp., known as Kogas, has expired.
Chevron was due to sell three-quarters of the LNG to Kogas, with the remaining volumes supplied by other Wheatstone shareholders. The deal also envisaged Kogas—the world's largest LNG importer by volume—buying a 5% equity stake in the Wheatstone processing plant and nearby gas fields.
"At this point in time there is a significant probability that we will not have a deal with Kogas," Mr. Kirkland said, without elaborating on why the two sides were unable to reach a binding agreement.
Chevron is now talking to "multiple parties" that may potentially buy gas from Wheatstone's foundation phase, he added.
A Kogas official in charge of LNG imports said the Korean company had been unable to bridge differences with Chevron over the LNG price. Kogas later signed long-term supply deals from Australia with Shell and France's Total SA.