ExxonMobil Is Betting $30 BILLION That They Can Push 9.9 Billion Cubic Feet Per Day Of Natural Gas Into The World Energy Market

Forbes Magazine has a cover story designating ExxonMobil as the “Green Company of the Year”. The basis for that designation is the soon-to-be-completed liquified natural gas (LNG) project in Qatar. That project will produce 9.9 Billion cubic feet per day of natural gas in a form that can be shipped around the world from one of the largest natural gas reservoirs ever discovered – Qatar’s North Field. That field, which stretches 80 miles across the Gulf towards Iran, contains an estimated 900 trillion cubic feet of methane and other petroleum products.

At current prices in the US – $3.7 per thousand cubic feet (MCF) – 9.9 billion cubic feet per day of natural gas would sell for $37 million per day, more than $13 billion per year. At last year’s average price for imported LNG of $10 per MCF, that much natural gas would have sold for $99 million per day or more than $36 billion per year. ExxonMobil’s bankers, accountants, leadership and shareholders would prefer last year’s prices to return sometime soon.

The output from the LNG megaproject would also provide the fuel needed to operate about 50-55 GW of electrical power plants round the clock, roughly 10-12% of US electrical power demand. If the LNG all came to the US – which is not likely – it would increase the overall supply of gas by about 15%, assuming no other production gets shut in to make room for that amount of gas in the market.

Those are some impressive numbers; ExxonMobil and her partners obviously have a large stake in the market choices being made by electric utilities and other large potential natural gas customers around the world. One of the risks mentioned in the article is that Japan and South Korea have recently reduced their LNG imports. There are at least two reasons for that trend:

• The world wide recession that has reduced manufacturing output and related energy input.
• Japan has restored part of its mammoth Kashiwazaki-Kariwa nuclear power station back to operation.

As reported in its most recent quarterly report, Tokyo Electric has told its investors that restarting some units at the station has significantly reduced its fuel costs. (Translation for oil and gas companies – the restart has reduced their sales and revenues.)

Finding a market for the output of a vast new LNG facility when some big customers are shifting to other means of producing useful power is going to take some hard work and smooth tongues. Here is part of the marketing pitch by ExxonMobil as interpreted by Forbes Magazine to try to find a place for all of that gas in a market that appears to be well supplied.

The engineering solution to the matter of carbon in the atmosphere: Drill for natural gas. Per unit of energy delivered, methane releases 40% to 50% less carbon dioxide than coal and a quarter less than petroleum. Coal fuels half of U.S. power generation. Replacing all of it with methane would cut CO2 emissions by 1 billion tons a year. Could windmills come close to that in reducing greenhouse gases? Not easily. To get the same emissions reduction you would have to replace half of power plant coal with 80,000 giant turbines covering 400,000 acres of ground. “Natural gas is the answer to green-energy low-carbon concerns,” says Neil Duffin, president of ExxonMobil’s project development company.

Naturally, I think there is a far better way than either drilling for gas in the same unstable area of the world where we get our oil or erecting 80,000 windmills. First of all, natural gas burned in an efficient combined cycle power plant might release 45-50% of the CO2 of coal burned in a traditional steam plant, but LNG has an energy intensive production “tail” that shifts that comparison to 55% of the CO2. (Quite honestly, I thought it was worse than that, but the data from the Federation of Electric Utilities of Japan did not agree. I was tempted to hunt for a more dramatic number, but decided that would not be fair or honest.) I am even more dismissive of considering wind turbines as a way to reduce coal fired power – they are simply too erratic to be considered for baseload power and would most likely displace electricity from quick responding natural gas or hydro units instead.

ExxonMobil and its Qatar partners are determined that their product will find a market; they have invested a great deal of time and money into the project, which currently employs about 145,000 engineers, technicians, and construction workers. Christopher Helman, the Forbes reporter, talked to Rex Tillerson, CEO of ExxonMobil, about the challenge of starting up a vast new supply of natural gas. He laid out the situation of a market where the price has dropped by 70% in the past year and where drillers have found ways to crack “tight gas” formations to release new reservoirs.

All of this raises the question whether ExxonMobil’s LNG bet, shipping gas from the other side of the world, will come a cropper. Tillerson smiles. “We’re just doing what we always do,” he says. It’s not by accident that ExxonMobil has exceeded a 30% return on capital the past four years. “Qatar LNG can pretty well compete with anything,” he insists.

That lays down a gauntlet to competitors, but it also raises a question about just how ExxonMobil can so confidently claim that it always makes money on a capital investment that assumes sufficient demand for the final product. After all, how does ExxonMobil know that utilities will decide to burn natural gas as a response to increasing costs for CO2 emissions instead of building new nuclear power plants? How does it know that domestic gas producers will not find a way to keep supplying the market at a far lower cost than is possible for a fragile system that requires refrigerating gas to -260 degrees F, packing it into the world’s largest LNG tankers traversing the Straits of Hormuz, crossing the ocean, and finding a port with a terminal that can expand that gas into a pipeline system that can transport it?

One has to wonder if ExxonMobil believes that the fix is already in to ensure that natural gas gets favored in the current climate legislation that is being discussed in Washington and also believes that LNG will qualify for the same treatment as all other forms of natural gas. I like natural gas (less than I like atomic energy, mind you), but one of the real advantages that natural gas has right now is that almost all of what we burn in the US comes from either domestic sources or Canada. From a national security perspective, increasing our dependence on tankers traversing the Straits of Hormuz and on a gas field whose boundaries cross into Iranian waters seems like a very poor plan when we have far better options. Like Senator Alexander, I favor building a lot of new nuclear power plants that can provide emission-free electricity for decades, employ thousands of Americans, build on a technology that we invented – with a lot of help from European immigrants, and use domestic fuel resources like uranium and thorium.

As a freedom loving person, I strongly dislike dictatorships, but dealing with them seems to be a core competency for large multinational resource companies like ExxonMobil.

Tillerson has visited Qatar three times this year. He says he’s not worried about being dependent on one country for such large volumes of its raw material. “Whenever I meet the emir, the last thing he says to me is always: ‘Mr. Tillerson, you know we are committed to our agreements with ExxonMobil, and we will always stand by our agreements.’ I appreciate that he says it,” says Tillerson. “I take his word as his bond, and in our business that means a lot.” Adds Chase Untermeyer, former U.S. ambassador to Qatar: “The Qataris
remember who their friends are. Relationships are paramount.”

For the sake of all of the people who have part of their life savings and pensions invested in ExxonMobil stock, I sure hope that whoever succeeds the emir also stands by his agreements. The track record in similar countries is not necessarily good; many of them have nationalized their resources and the associated infrastructures in the past.

Tillerson makes an interesting comment when asked why his company has invested so much into its Qatar operations instead of investing a similar amount in a pipeline that could move natural gas from Alaska to the lower 48.

“People ask me all the time, ‘What’s the holdup?'” says Tillerson. “‘You made all these billions of dollars of commitments in Qatar; why can’t you make them in Alaska?'” In short, he says, it’s because Qatar is “willing to put terms in place to give you stability to go out and make that kind of commitment.” But, he says, “we have difficulties having that same kind of conversation, not just with Alaskans but in this country in general.”