ExxonMobil's $41 Billion Deal With China

• Report this Comment On August 21, 2009, at 5:01 PM, eclecticfool01 wrote:

  With the China deal, ExxonMobil has succeeded in securing outlet for its share of the output of the Gorgon field. Exxon knows what the unit cost for its share of output is going to be, and thus by entering into an arragement that allows it to sell its LNG output forward for the next 20 years, it has established a secure cash flow stream and thus it has locked in a known margin and a predictable return on investment.

  I read in another article that Exxon sold the gas at "bargain prices." I don't know where the writer got that notion. Such characterization of "bargain prices" is, simply, erroneous. In fact, when one works the arithmetic and amortizes the value of the entire package over the total delivered amount of natural gas, the average comes out to about $17/MBTU on a delivered basis. Compared to about $3/MBTU which is where the U.S. market for natural gas closed today, and granted I am comparing a CIF price China with an FOB price in the U.S. --- freight from Australia to China will still leave a healthy margin for Exxon to enjoy.

  Exxon is slated to begin importing LNG from Qatar into its U.S. Gulf import facilities at Sabine Pass as soon as repairs resulting from last year's hurrican damage are completed. I understand that should happen within the next few months.

• Report this Comment On August 21, 2009, at 7:43 PM, madamebutterfly1 wrote:

  I agree with some of eclecticfool's comments or at least the implications of his comments, that Exxon has done well at closing this Gas deal with China such that with this deal it has essentially sold out its share of the gas it needs to market in the next 20 years for Gorgon. However, I should point out that Gorgon's development cost is a bit higher unit cost LNG development than is Qatar's for Exxon.

  I say this to make sure that someone does not misread the significance of the $17 per million BTUs sale price, especially in light of the low prices we see here in America. If one normalizes this $ figure for the expected inflation in the next 20 years, then one can see than on a non-inflated dollar adjusted basis, the $17/MBTU may dropped to probably less than half that number in 20 years. So margins will be shrinking.

  While I have no direct idea of what Exxon is making on this deal, I can certainly speculate that it has probably negotiated a level that will yield returns comparable to other upstream projects. And who knows perhaps returns have been discounted by a percentage to account for the lower risk of the deal since the price and the volumes are essentially committed and fixed with the Chinese company.

  About 3 or 4 years ago, Exxon was in no hurry to develop this Gorgon project-- because of its cost since at the time in was eyeing Sakhalin gas-- a much cheaper development, for export to China through a gas pipeline.

  What changed? My guess is that given the bullying and chest thumping by the Russian authorities through its proxy company, Gazprom, regarding the forceful opposition expressed to Exxon's plans to export Sakhalin gas to China, Exxon may have read the probability Tea Leaves and may have decided instead to go the Gorgon route to hedge its bets of an outright gas export prohibition from mother Russia, especially since Exxon had already committed to supply Gas to China -- Gas that is going to be needed not only to reduce the carbon foot print of Chinese power generation, much of which is fueled by "dirty' coal, but also as a source of feedstock for its Chemical plants.

Add your comment.