Total SA Boosts Its Presence in This Rapidly Growing LNG Market

Led by rapidly growing demand from Asian markets, global demand for liquefied natural gas is expected to double by 2025. Aiming to capitalize on this expected growth, French oil major Total SA (NYSE: TOT  ) recently made a big move that will allow it to capture a larger share of the fast-growing Chinese natural gas market. Let's take a closer look.

An LNG import terminal in Kochi, India. Photo Credit: Taken by Augustus Binuwww.dreamsparrow.net

Total inks gas supply deal with CNOOC
On Wednesday, Total announced that it has signed an LNG cooperation agreement with China National Offshore Oil Corporation, or CNOOC, that will further strengthen the two companies' existing partnership.

Since 2010, Total has been supplying CNOOC with as much as 1 million tons of LNG per year as part of a 15-year contract. Under the new agreement, the two parties have agreed to a price review of this existing supply, established a framework for additional supply of 1 million tons per year, as well as further cooperation throughout the LNG value chain, according to a press release from Total.

Total has already established a strong presence in the Chinese natural gas market. Having delivered a total of 5 million tons of LNG between 2010 and 2014, it currently supplies more than 8% of the Chinese market. By strengthening its existing relationship with CNOOC, the third-largest LNG importer in the world, the company will have an even larger presence in China, where demand is expected to grow at an annual rate of 20% over the next few years.

The rush for Asian LNG
In addition to its strong relationship with CNOOC, Total also recently edged out ExxonMobil (NYSE: XOM  ) and Royal Dutch Shell (NYSE: RDS-A  ) in a three-way bidding war to acquire a majority stake in two natural gas fields in Papua New Guinea. Total paid $613 million up front for a stake in the nation's Elk and Antelope gas fields, which it will develop alongside joint venture partner InterOil Corp. (NYSE: IOC  ) . The company plans to export gas produced from the two fields to nearby Asian markets.

Total's recent moves are reflective of the current frenzy among the Western oil majors to capitalize on growing LNG demand from major Asian markets such as China, Japan, India, South Korea, and Taiwan. Companies including Total, Shell, Exxon, BP, and ConocoPhillips (NYSE: COP  ) are all pursuing major LNG projects that will primarily serve Asian markets.

Exxon, BP, TransCanada, and ConocoPhillips have teamed up to develop a massive LNG export project in Alaska that will include an 800-mile pipeline connected to oil fields in Alaska's North Slope and a liquefaction facility in the Kenai Peninsula. The project's liquefaction facility could potentially ship as much as 18 million metric tons of LNG per year, mainly to Asia.

Chevron is also developing two massive LNG projects off the West Coast of Australia -- the Gorgon and Wheatstone LNG projects -- to serve Asian markets. The two projects will have a combined production capacity of nearly 25 million tons per year, the majority of which is already under long-term contract with primarily Asian buyers. Chevron says Gorgon and Wheatstone are about 80% and 30% complete, respectively, and are slated to go into service by 2016.

Total positioned for stronger growth
Given the highly positive outlook for LNG demand growth in Asia, Total's various LNG projects and cooperation with China should serve the company well over the long term. Though LNG projects require massive amounts of upfront capital expenditures, they generate strong and stable cash flows for decades and require little additional spending after starting up.

In addition to its growing LNG presence, Total's declining spending and rising cash flows are another reason to be optimistic. The company's capital spending peaked last year and is expected to be about $3 billion-$4 billion lower over the next few years. Meanwhile, operating cash flow is set to rise sharply thanks to major new project start-ups such as CLOV in Angola, Ekofisk South in the Norwegian North Sea, Ofon 2 in Nigeria, and others, which bodes well for additional dividend increases.

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