(NYSE: XOM) The impact of the liquefied natural gas boom on Papua New Guinea

(NYSE: XOM) The impact of the liquefied natural gas boom on Papua New Guinea

Natural gas and liquefied natural gas, commonly referred to as LNG, were once thought to be miracle fuels. Vast supplies, combined with a number of advantages over existing fossil fuels, have compelled many nations to make natural gas, and LNG, key strategic priorities going forward. Oil companies have repeatedly reiterated the benefits of natural gas versus other forms of energy, which is why Exxon Mobil (NYSE: XOM) built a massive LNG plant in Papua New Guinea. 

While the benefits of natural gas are clear, LNG production has a downside. There are unintended consequences to the global natural gas boom, in places like Papua New Guinea, where abundant supplies of natural resources have sparked huge growth in natural gas and LNG exploration and production. This LNG revolution was supposedly going to usher in a new wave of economic prosperity for the nation, lifting millions of people into the middle class. But Papua New Guinea has seen a notable rise in social unrest this year, as a discord has formed between the Papua New Guinea government and the local landowners over royalty payments.

This situation now threatens production, which could throw the Papua New Guinea project into disarray.

Why LNG Matters

LNG is an extremely cold liquid, which is produced by cooling natural gas to very low temperatures. The liquefied form does not need to be stored with additional pressure, which means it occupies much less space than traditional natural gas. In fact, Exxon Mobil states that liquefying natural gas reduces its volume by 600 times. This allows for safe and cost-effective transportation. 

The LNG is stored and transported on specially-designed vessels. The reduced volume of LNG makes it economically possible to send large amounts of it over long distances. Once the LNG reaches its end destination, it is then warmed up, or “regassified”. It can then be transported via pipeline, to eventually reach its end users.

These possible benefits have fueled hopes that LNG can be part of a lower-carbon energy mix. For example, the oil and gas industry insists that natural gas is half as polluting as coal for power generation. Furthermore, LNG has a number of benefits versus diesel fuel, including 20-30 percent fewer carbon dioxide emissions than distillate fuels, and LNG emits 75 percent less nitrogen oxide, a leading contributor to smog and ozone pollution, than diesel.

That means for investors who want to construct a more socially-responsible portfolio, Exxon Mobil’s vast investments in LNG production could make it a more optimal stock pick than other fossil-fuel producers that have not embraced LNG. However, there are some drawbacks to LNG production that could still give investors pause, namely the adverse social impacts of LNG development in places like Papua New Guinea. That nation has seen a notable rise in LNG production due to vast resources, but the country has also seen a spike in social unrest, which calls into question the social benefits of LNG production.

Big Oil Plants its Flag

There is perhaps no company that has made a bigger footprint in LNG than Exxon Mobil, and it has planted its flag in Papua New Guinea. The company has called its project there ‘PNG LNG’. It entails a gas conditioning plant, liquefaction plant, storage facilities, and over 700 kilometers of pipelines connecting the facilities. This is a huge project that, once completed, will produce 6.9 million tonnes of LNG per year. It first produced LNG in April 2014, and it is expected that over the anticipated 30-year lifespan of the project, over 9 trillion cubic feet of gas will be produced and sold. In all, the project is expected to cost more than $19 billion. 

The massive investment in Papua New Guinea makes a great deal of business sense. There are huge amounts of available resources there, which are now suddenly unlocked thanks to technological advancements in drilling technology. And, Papua New Guinea is perfectly situated geographically to service the rapidly-growing emerging markets in the Asia-Pacific region of the world. The project will provide long-term supplies to four major customers in the Asia region, who will distribute the product to millions of consumers.

Unintended Consequences

However, this year, relations between local landowners and the Papua New Guinea government have deteriorated. At the heart of the issue is that landowners, who own nearly 3 percent of the project, have not been receiving their full share of royalties that they are entitled to. 

In response, Exxon Mobil has said it is concerned by the situation and the failure to remit payments to landowners. If the situation were to deteriorate badly enough, it has been reported that landowners have threatened to “turn the taps off”. This would be a severe blow to Exxon Mobil, which has invested billions in the project.

The implication for investors is to watch the developments at Exxon Mobil’s PNG project closely in the coming months. If all goes smoothly, the project will meaningfully add to Exxon Mobil’s production, which will be a significant source of new revenue. Complications may arise, however, from the extremely low oil and gas price environment the industry currently finds itself in, and the claims by local landowners against the government.

 

Companies to Watch

Exxon Mobil is not the only company making massive investments to service the rapidly-growing demand for energy in the emerging markets.

Chevron (NYSE: CVX) has built two separate, massive natural gas projects in Australia. These are called Gorgon and Wheatstone, and like PNG LNG, they are also huge investments. Wheatstone is a $29 billion project which includes two LNG trains with a combined capacity of 8.9 million tonnes per annum and a domestic gas plant. First shipments are expected in 2016. Meanwhile, the Gorgon development is one of the world's largest LNG projects.

Bob Ciura is an independent equity analyst. Since 2012, his work has focused on fundamental investment analysis of publicly-traded companies in the energy, technology, and consumer goods industries. Bob has a Bachelor's degree in Finance and an MBA in Finance. 

 

Originally published on December 16, 2015