Gorgon Gets Go-ahead: Chevron - Analyst Blog

Yesterday, U.S. oil major Chevron Corp. (CVX) and its partners announced the final investment decision on the massive Gorgon liquefied natural gas (LNG) venture in Australia following the receipt of the necessary government approvals. The company said that its Australian subsidiary will proceed with the construction of the project later this year.

Chevron holds a 50% operated interest in the A$43 billion ($37 billion) project, with the other partners being ExxonMobil Corp. (XOM) and Royal Dutch Shell PLC (RDS.A). The Gorgon gas fields, off the coast of Western Australia, are estimated to contain 40 trillion cubic feet of gas deposits and have an expected economic life of at least 40 years from the time of start-up. Chevron said that the venture will have an annual capacity to produce 15 million tons of LNG, with the first shipment expected in 2014.

The Gorgon project will comprise three production trains and a gas plant, to be built on the environmentally sensitive Barrow Island nature reserve. Australian government’s approval to the venture is subject to conditions on managing and protecting local fauna, especially the endangered flatback turtle. Gorgon is also a milestone in terms of being the world’s largest carbon sequestration project. Chevron will shell out A$2 billion to bury 40% of Gorgon’s greenhouse gas emissions (or 3.4 million tons per annum) by injecting the gas into a reservoir 2 km (1.2 miles) below the Barrow Island.

Last week, Chevron entered into multiple deals worth A$70 billion ($60 billion) to sell nearly 3 million tons of LNG from the project to Japan and South Korea. The company expects further sales of Gorgon LNG in the coming months. ExxonMobil and Royal Dutch Shell have already signed deals to sell much of their share of Gorgon production to Asian importers, including PetroChina Co. Ltd. (PTR).

We believe that the Gorgon go-ahead decision will significantly boost Chevron’s long-term growth prospects in the fast-growing LNG market. Also, the business environment for LNG continues to remain robust, with demand likely to grow at around 8-10% annually over the next few years in all major markets. The Gorgon project provides Chevron and its partners an attractive strategic position for serving the fast-growing economies of China and India, plus other Asian countries.

San Ramon, California-based Chevron is the fourth-largest publicly traded oil and gas company in the world, based on proved reserves. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals and other energy-related businesses.

We currently rate Chevron shares as Neutral.