Oil & Gas Sector- Gorgon project on the way

Oil & Gas Sector - Gorgon project on the way
Call: Overweight (Unchanged)

* Chevron announced that it had agreed with its two partners, Shell and ExxonMobil on the final investment plan for the Gorgon liquefied natural gas (LNG) project in West Australia. Chevron announced that A$43bil would be used to develop the first phase of the Gorgon fields, which is expected to ship LNG to its clients in China, India, Japan and South Korea in 2014. Final hurdle was crossed after Shell approved the project at a board meeting held last Friday.

* Located on Barrow Island, about 130 km off the north-west coast of Western Australia, the Gorgon natural gas fields have about 40 trillion cubic feet of natural gas in reserve, equivalent to 6.7 billion barrels of oil reserve. Chevron will own a 50% stake in the liquified natural gas (LNG) venture while ExxonMobil and Shell will both have 25% stakes.

* The three partners are planning to build undersea pipelines with lengths of 865km connecting Barrow Island, a domestic gas plant, and a gas processing facility on the island with three LNG trains. Each train would be able to transport 5 million tonne of gas per annum, with a total production capacity of 15 million tonne a year. Each of the three partners will be responsible for marketing their own share of the Gorgon venture.

* Last month, PetroChina Co agreed to buy 2.25 million tonne of LNG per year from these gas fields in a deal worth A$50bil. Last week, Chevron and its partners announced further deals worth A$70bil to sell Gorgon gas to Japan and South Korea.

* Malaysian companies, which are bidding for jobs from Gorgon field are Wah Seong Corp (Wah Seong) and KNM Group (KNM). Currently, there are only two pipe-coaters who have been short-listed for the project, Bredero Shaw and Wah Seong. With value of the pipe-coating contract estimated at up to US$200mil, there is a high likelihood that the job could be split between the two players. We also understand that KNM is bidding to provide process equipment on tenders worth a few million US dollars for the LNG plant.

* There is another LNG project in Papua New Guinea involving a 440km pipeline, which is expected to be announced this year. Like the Gorgon project, only Bredero Shaw and Wah Seong have been short-listed for the pipe-coating job. There are another two significant LNG projects in Australia - the Browse filed of Western Australia's north-west coast and Ichthys - near Maret Island off Western Australia. Browse is expected to commence production by 2013-2014 with Ichthys by 2014-2015. Both Wah Seong and KNM are bidding for these projects. All in, including the Gorgon project, value of the pipe-coating contracts alone could be worth up to US$1bil.

* With the agreement on Chevron's investment plan, we expect the pace of announcement for the smaller packages to accelerate. Wah Seong had earlier expected that the Gorgon award to come in August-September this year. We continue to be positive on the O&G sector with our OVERWEIGHT call on the sector with top picks being Kencana Petroleum and SapuraCrest Petroleum. We also like Boustead Heavy Industries Corp, Coastal Contracts, Alam Maritim Resources, Sealink International and Wah Seong. Our HOLDs are Petronas Gas, KNM and Dialog Group. We have SELL calls on Scomi Group and Tanjung Offshore.