Europe is facing an energy crisis. Prices for natural gas and electricity are skyrocketing, driven by its reliance on Russian gas. Russia has reduced supplies in response to sanctions following its invasion of Ukraine, forcing Europe to scramble to secure gas supplies elsewhere.
Energy giant Chevron (CVX 0.44%) is working to help solve these problems by looking for ways to boost its liquefied natural gas (LNG) capabilities and send more supplies to Europe. That potentially positions the oil company to capitalize on the strengthening LNG market.
Taking its LNG business to another level
Chevron has a sizable LNG business. It owns interests in several LNG export facilities around the world, including Gorgon in Australia. It focuses on producing LNG for the Asian market because it has been a big demand driver in recent years.
However, the company has started pivoting its LNG activities and ramping them up in response to surging European demand. Colin Parfitt, vice president for midstream at Chevron, discussed the company's LNG ambitions in a recent interview picked up by Bloomberg: "We have been mostly focused on Asia because that's where our assets are, and now we are focused much more globally because we are adding assets that fit much better to meet demand into Europe." Parfitt said Chevron is in discussions with companies "from all over Europe" as it seeks to supply the continent with gas.
One way Chevron can supply gas to Europe is through its marketing arm. In late June, Chevron signed deals with two LNG project developers in the U.S., seeking to bring the country's abundant gas supplies to global markets. Chevron agreed to buy a combined 2 million tons of LNG per year from Cheniere Energy (LNG -0.93%) and Venture Global LNG.
It will start taking deliveries of LNG from Cheniere in 2026, with contracts that extend until 2042. Meanwhile, its Venture Global deal spans two facilities, including one under development. These deals will enable Chevron to sell this LNG overseas in the coming years, with some of the gas likely heading to Europe.
Chevron is looking at other ways to bring more gas supplies to Europe, including exploring several potential natural gas liquefaction and export projects. One option it's evaluating is expanding its natural gas production in Israel. Chevron is considering building a floating LNG production facility that would liquify and export gas produced offshore Israel, with the potential to send it to European buyers.
Cashing in on gas
Chevron's LNG investments could pay big dividends down the road. For example, its LNG contracts with Cheniere allow it to buy gas at a price indexed to the Henry Hub (a common U.S. natural gas benchmark) plus a fixed liquidation fee. Chevron can then sell that gas at global market rates. The spread between the two can be significant given much higher global gas prices, enabling Chevron to make a sizable profit on the trade. With the volatility of gas prices, Chevron could mute some of the variability by signing sales contracts with European buyers for the gas it takes from Cheniere and Venture Global to lock in a profit while prices are attractive.
Meanwhile, the company's investments to increase its gas production and LNG capacity could deliver sizable future profits, potentially enabling Chevron to capture even more of the natural gas value chain, earning profits from producing, liquefying, and selling LNG into the European market.
Capitalizing on the shift to energy security
Europe needs to diversify its natural gas supplies away from Russia to increase its energy security. Chevron wants to help the continent achieve that goal, leading it to ramp up its LNG investments. This move could have a big payoff if gas prices remain elevated. That makes Chevron a potentially attractive way to play the energy crisis in Europe because it could make a lot of money by providing the continent with more gas to meet its needs.
