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Big Oil Squares Off in a Battle for LNG Supremacy

We're still a few years away from LNG exports in the U.S., but the LNG game is ramping up all over the world. There are immense opportunities to profit from this venture, but it's going to be an extremely competitive sector in the future. Let's look at what we could expect from LNG in the future and who could come out on top.

Lay of the land
Natural gas is an interesting creature. Unlike its other commodity cousins oil and coal, moving natural gas from one place to another is exceedingly difficult. The process to liquefy and transport natural gas makes means that prices can vary wildly based on geographic location. That's why so many companies are looking to take advantage of this situation.

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts

At the same time, the market for natural gas exporting is poised to become a very competitive space. According to Wolfgang Moehler at IHS, there is a need for 60 million to 80 million tons of additional LNG capacity between now and 2020, but there are proposals for 250 million tons of LNG export capacity in the U.S. alone. What this means is that there are a lot of facilities that will probably never see the light of day. Meaning that companies that want to make major inroads in this market will need to move quickly and have big checkbooks to cover the costs of these expensive projects.

The candidates
Royal Dutch Shell 
(NYSE: RDS-A  ) : Of all the publicly traded major oil and gas companies out there, Shell has quite possibly the most expansive existing LNG infrastructure. The company has a working interest in eight existing LNG export terminals located in the Middle East, Nigeria, and Southeast Asia and owns or operates 56 LNG vessels, all combining to export about 20 million tons of LNG per year. This represents about 8.5% of all global LNG trade. 

Going forward, Shell has equity interests in three Australian LNG projects under construction, as well as proposals to build facilities in the U.S. and Canada, which all told would add another 18.5 million tons to its existing export capacity. But probably the biggest wild card for Shell is its floating LNG technology. If its floating facilities can prove to be economical, it could be a major player in some of the emerging natural gas plays such as East Africa, where there is very little existing offshore infrastructure for LNG

Chevron (NYSE: CVX  ) : While Chevron may not have the most LNG facilities currently in operation, the company is looking to make a big splash over the next couple of years. Chevron and its partners, BP and Total, just started making their first deliveries from the Angola LNG facility a few weeks ago, marking Chevron's first foray into LNG. Down the road, though, Chevron expects to bring on another 19.2 million tons per year of export capacity through its Gorgon and Wheatstone projects in Australia and its Kitimat facility in Canada. 

The biggest advantage Chevron has is that several of these facilities are fast movers. Kitimat was the first facility to get export approval from the Canadian government, and the Gorgon facility is more than two-thirds complete.

ExxonMobil (NYSE: XOM  ) : Exxon has a long history of LNG, as the company has been involved in some of the earliest LNG projects in Qatar and Indonesia. Today, the company is second only to Shell for LNG capacity, with an ownership of just over 19 million tons per year of LNG capacity, most of which is in Qatar -- the world's third largest natural gas reserves holder and responsible for 30% of global LNG in 2012.

Based on projects in the pipeline, Exxon is taking a more measured approach to LNG exports in the near term compared with its competitors. The company does have a 25% stake in Gorgon and is currently developing its own LNG facility in Papua New Guinea, but this represents only 6.5 million tons of LNG that is currently under construction. Rather, Exxon is looking at making an impact further down the road with a 30 million-ton-per-year facility in Canada and an agreement with Rosneft to develop gas in both the U.S. and Russian parts of the Arctic Sea.  

Exxon's plans are very ambitious in the long term, but the question remains whether the demand for LNG will remain while it waits in line for approval on some of these massive facilities. Considering the terrible quarter the company just had, it might be wise to focus on projects that will have a more immediate impact.

What a Fool believes
Of the three companies, Chevron is most likely see the most immediate impact to the bottom line from these LNG investments. The Gorgon facility will represent a boost of 200,000 barrels per day equivalent to production, which, based on the company's current adjusted return per barrel of oil equivalent, would represent about $4.7 billion in earnings per year for the company. Over the long term, though, Shell's combination of existing facilities, shipping fleet, and project pipeline appear to place Shell on the throne as the premier LNG exporter for quite some time to come. 

What makes the current LNG space so challenging for investors today is the uncertainty that these facilities will get built. Don't let your investments be predicated on these uncertain prospects. To help you invest better in the energy space, we've put together a special report called "The Only Energy Stock You'll Ever Need," which outlines one behind-the-scenes energy giant that is posed to profit regardless the outcome in the energy space. To get a free copy of this valuable report, simply click here.

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9/28/2016 4:01 PM
CVX $102.15 Up +3.17 +3.20%
Chevron CAPS Rating: ****
RDS-A $48.72 Up +1.62 +3.44%
Royal Dutch Shell… CAPS Rating: ****
XOM $86.90 Up +3.66 +4.40%
ExxonMobil CAPS Rating: ****