Oil and Gas Companies Are Targeting the Asian LNG Market

Many oil and gas companies have started considering capital investment decisions as they converge toward the Asian LNG market. This is not much of a shock if you notice how fast the LNG market in Asia is growing compared with global consumption. Moreover, higher LNG prices are also playing their part in attracting oil giants like ExxonMobil (XOM 1.23%), Chevron (CVX 1.50%), and Total SA (TTE 1.45%) to the region.

Total is now opting to control its costs by targeting both operating and capital expenses. The company slashed capital expenditure by 7% to $26 billion and intends to bring it down further in the coming years. This reduction in capex does not mean that Total is willing to compromise its growth. According to the CEO of the company, it wants to focus on cash generating projects in order to tackle inflation related issues.

Strengthening LNG Market
Total is making sure that it is ready to exploit the expected growth in the LNG market by investing heavily in different LNG projects. Recently the company made an announcement about the final investment decision regarding the Yamal LNG project. This $27 billion project, in which Total has a 20% stake, has the capacity to produce 16.5 million tons of LNG annually. Furthermore, it is one of the most cost-effective LNG projects as it is located in a Russian region where the government is giving tax exemptions in order to promote exploration and extraction. This project is expected to be online in 2017 at a production cost of $1,640, which is quite low compared with the production cost of $2,290 for a similar project. Such cost factors can give Total an edge over is competitors and will also keep the new project in line with the company's plan of low operating costs.

The company is also strengthening its LNG production. This is evident from Totals' outbidding Exxon and Shell for the acquisition of a major stake in Papua New Guinea's Elk-Antelope gas fields. Under the acquisition deal, Total acquired a 40.1% interest in the fields after paying $401 million upfront. This region is an attractive natural gas hub, and giants like Exxon and Total are exploring and spending heavy capital. Total plans to sell the extracted LNG from these fields in the Asian market, just like Exxon, in order to exploit higher prices.

Total has also taken steps to keep a firm grip on the Chinese LNG market, which is expanding its LNG import terminal due to increasing energy requirements. At the end of March 2014, the company signed a deal with its existing customer, China National Offshore Oil Corporation (CNOOC). The two companies had signed an agreement back in 2010 for the supply of 1 million tons per year for a 15-year term. The new agreement is just a price review of the existing supply with the addition of a further 1 million tons of LNG per year. Total already caters to 8% of the Chinese market with the delivery of 5 million tons of LNG (from 2010 onwards) and will now penetrate the market further with the recent additions to the LNG supply contract.

Financials

Data from Reuters

While we have seen how much Total plans to invest this year, it does have a few strings attached. The liquidity position of the company is not in line with the industry as can be seen from the above table. Furthermore, the long term debt level is also quite high. This means that the capex will be financed via the divestment plan the company announced last year.

Total announced that it plans sell $20 billion worth of non-core assets during 2014 and would divest further if required. It means that the sale of Block 15/06 to Sonangol E&P for $750 million is just an indication of what's coming next. Divesting non-core assets is a good strategy as it will help the company in keeping its focus on cash-generating projects while staying in line with the cost cutting strategy.

*Total SA dividends are shown after applying 30% withholding tax on dividend