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Chevron Seeks To Weather Storm Of Low Prices With China LNG Deal

U.S. energy giant Chevron Corp. says it’s got a tentative deal to sell liquid natural gas (LNG) from its Australia operations to a Chinese energy company in a move that may help it ride out a period of rock-bottom prices for the fuel.

Chevron announced Tuesday that it has reached a non-binding agreement to sell as much as 1 million metric tons of LNG a year for 10 years from its Gorgon and Wheatstone gas-export projects in the state of Western Australia to China Huadian Green Energy Co. beginning in 2020. China Huadian is a subsidiary of the state-owned power generator China Huadian Group.

The deal, if it becomes final, would be a major financial boon to Chevron at a time when the price of LNG has plummeted by about two-thirds to below $7 per million British thermal units (BTUs), the standard energy metric for the fuel. Part of the reason for the price drop is Australia’s effort to eventually out produce Qatar as the world’s leading LNG producer.

Related: Oil Price Scenarios For 2016

And if a final deal includes the full amount outlined in the tentative agreement, China Huadian’s purchase would cover more than 80 percent of Chevron’s Australian gas production. Chevron’s Gorgon Project alone is a combination of the Gorgon field and the nearby Jansz-Io field. Its top capacity is estimated at 15.6 million metric tons of LNG a year.

“This is an important step in the commercialization of Chevron’s natural gas holdings in Australia and the establishment of our global liquefied natural gas portfolio,” said Pierre Breber, Chevron’s executive vice president for gas and midstream. “As Chevron continues to grow into one of the world’s largest LNG suppliers, this agreement represents further progress and diversification of our sales portfolio.”

Related: Don’t Expect An Exodus Of Crude Now The Export Ban Is Lifted

Many energy companies, Chevron among them, invested generously in LNG developments hoping that Asian countries, in need of energy sources cleaner than coal, oil and gasoline, would increase their demand for gas as their middle-class populations grow. But in many cases their efforts have been hampered by the falling prices of fossil fuels.

Among U.S. energy companies, Chevron is the second-largest in terms of revenue, but the company is feeling the pressure of low energy prices. In October it announced that it would lay off 10 percent of its work force and plans to reduce capital spending by about one-fourth in 2016 to between $25 billion and $28 billion. It also intends to reduce its budget further in 2017 and 2018.

Related: Just About Every Part of the Permian Basin is Unprofitable at $30 Per Barrel

And that’s the reason Chevron’s pending deal with China Huadian so valuable, according to Roy Krzywosinski, the managing director of Chevron Australia.

“We … look forward to building lasting relationships with our customers in the region as the Chevron-operated Gorgon and Wheatstone projects move into operations,” Krzywosinski said. “The China Huadian agreement demonstrates Chevron’s equity gas from Australia is well-placed to meet the growing demand for natural gas in the Asia-Pacific region.”

This isn’t Chevron’s first deal to supply LNG to an Asian company. In January, the company, based in San Ramon, California, signed a contract with South Korea’s SK LNG Trading Pte Ltd to supply 4.15 million metric tons of its Australian LNG for five years beginning in 2017.

By Andy Tully of Oilprice.com

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