Exxon Ignores Near-Term Glut to Play Long Game on Liquefied Gas

(Bloomberg) -- When it comes to natural gas, Exxon Mobil Corp. believes in playing the long game. 

As competitors continue to flood the world market with a liquefied form of the fuel, depressing prices, Exxon is heeding the advice of forecasters scanning a quarter-century beyond the current  glut. Their view: LNG demand will rise 1.6 percent a year through 2040, more than double the rate for crude oil.

With much of that growth set to come from the Asia-Pacific region, the world’s biggest energy producer is working to bookend the area with resources, pursuing promising but as-yet untapped natural gas fields in Papua New Guinea and Mozambique that won’t produce for years. It’s a strategy that stands in stark contrast to Royal Dutch Shell Plc’s takeover of BG Group Ltd., an established producer that promises to quickly swell Shell’s LNG exports, even as prices remain low.

"Exxon has a different strategy in that it’s not looking to grow its gas business right now but is looking at what will happen in LNG 10 or 15 years from now," said Brian Hennessey, who manages $1.3 billion at Alpine Woods Capital Investors LLC. "The market’s going to get tight starting in 2020."

The influx of LNG from gigantic projects first conceived a decade ago has swamped markets with excess supply, dropping the average worldwide price by 37 percent last year to $9.77 per million British thermal units, according to the International Gas Union. In Japan, the world’s biggest LNG market, the price of cargoes from Qatar tumbled 70 percent in two years to $4.93 per million Btu.

But the glut may be short-lived as low prices spur new buyers to enter the market and the advent of low-cost import facilities enables poorer nations to receive cargoes.

Exxon spokesman Scott Silvestri referred to Vice President Jeff Woodbury’s remarks on long-term gas demand during a July conference call.

"Like any type of commodity," Woodbury said, "there are going to be periods of oversupply and periods of shortness, and we do expect that into the early part of the next decade that there will be some oversupply. But we keep focused on the long-term value proposition."

While internal projections used by Exxon to guide their investments show a clear picture of rising demand, forecasters at the U.S. Energy Information Administration are even more bullish. They predict demand will rise an average 1.9 percent annually through 2040.

Bidding War

That "tidal wave" of demand will overwhelm available supplies and pit major importing nations in a bidding war for LNG cargoes as soon as the early 2020s, said Fred Beach, assistant director for policy studies at the University of Texas Energy Institute, in a telephone interview.

"Consensus is that the LNG market will be over-supplied for the next 5+ years," wrote Anish Kapadia, managing director at Tudor Pickering Holt & Co. in London, in a note to clients on Wednesday. "However, there is the potential for the market to tighten around the end of the decade as we see downside risks to supply and upside risks to demand."

In July, Exxon agreed to pay between $2.3 billion and $3.6 billion for InterOil Corp.’s Papua New Guinea finds, and is in talks to buy stakes in the fields in Mozambique. The final value of the stock-and-cash agreement with Interoil, expected to close within weeks, depends on how large the natural gas reserves prove to be.

Nascent Development

More drilling is required to figure that out, as well as the optimal locations for production wells that can eventually produce natural gas for export. The Mozambique assets are in a similar state of nascent development.

The InterOil transaction will be Exxon’s biggest acquisition since a 2009-2013 spree in which the company acquired multiple North American gas drillers, including the $35 billion buyout of XTO Energy Inc. That foray has yet to pay off.


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