BP Marches Ahead with Tangguh LNG Project Expansion

Oil major gains final investment approval to an $8 billion investment for the project

Source: Company's Website
Source: Company’s Website

British oil company BP PLC (NYSE: BP) is going forward with the expansion of the Tangguh liquefied natural gas (LNG) project in Indonesia’s West Papua province after it gained final investment approval to an $8 billion investment on Friday, July 1st, 2016, as reported by Reuters. The approval has cleared the decks for a third train to start operations by 2018. BP is going ahead with the expansion of Tangguh project despite announcing that it would curtail spending in 2016 due to weak oil prices. BP made the final investment decision after confirmation with Tangguh production-sharing contractors, based on the commercial feasibility of the project. BP has also approved investment on an Egyptian gas field in early July 2016.

The Tangguh project includes two offshore platforms, 13 new production wells, an expanded LNG loading facility, and other infrastructure. The project already has two LNG production lines, known as trains, which has a production capacity of at least 7.6 million tons a year, and have been operational since 2009. With BP now gaining investment approval for another $8 billion, the Company and its partners plan to build a third train with a capacity of 3.8 million tons a year, which may start operating in 2018.

BP’s investment will increase annual LNG production capacity at the Tangguh project by 50% to 11.4 million tons. Roughly 75% of the gas from the third train will be supplied to Indonesian power utility Perusahaan Listrik Negara, with the remaining gas supplied to Japan’s Kansai Electric Power Co. The Tangguh project expansion would require 10,000 new workers, and includes drilling more than a dozen new wells and connecting them to new two offshore platforms to feed the facility with natural gas.

LNG glut in the offing

In May 2016, BP cut its budget for the Tangguh project to $8-10 billion from the earlier planned $12 billion. The British oil major has a major shareholding in the Tangguh project with a 37.16% stake. Its partners include MI Berau, China National Offshore Oil Co, and a joint venture between Mitsubishi Corp. and Inpex.

The Tangguh project is among more than 30 gas-cooling projects under construction around the world, churning out an additional 128 million tons of LNG a year. This would in turn expand the global production by 47% by the end of the decade, thereby creating a glut in the market. The global market currently uses 35 billion cubic feet of LNG per day. With a surge in LNG projects, analysts believe that the demand growth in Asia could decline over the years and international gas prices could fall further. BP’s expansion in Indonesia is one of just eight major projects that oil companies have approved in the past year.

BP reports biggest ever annual loss

BP is among the large oil companies that are going through a tough phase following a 70% slide in oil prices since the middle of 2014, when crude oil prices were below $40 per barrel, the lowest level since early 2009. The plummeting crude prices has forced oil majors to announced massive job cuts and slash spending on drilling wells, finding reserves and developing fields to a large extent. What’s more, oil majors are being threatened on one hand by the rise of renewable energy and climate policies that will curb demand for fossil fuel, and on the other hand, by the smaller companies that have taken the bold step to diversify into shale oil and gas production.

Adding to its woes, BP reported its biggest annual loss for FY15 on February 2nd, 2016. The oil major lost $6.5 billion in FY15 and its fourth-quarter underlying replacement cost profit (the Company’s definition of net income) was $196 million, well below expectations of $730 million. BP’s FY15 annual loss was bigger than the loss of $4.9 billion that it reported in 2010, despite the $17.2 billion costs incurred in Q2 FY10 after the explosion in the Gulf of Mexico.

BP announces job cuts

BP, which is still struggling with about $55 billion of costs from the 2010 oil spill, said it would cut 7,000 jobs by the end of 2017, or nearly 9% of its workforce. BP reduced operating costs by $3.5 billion in FY15 and expects to generate savings of $7 billion by 2017. It plans to cut 3,000 jobs in its downstream division by the end of 2017, on top of the 4,000 cuts in its oil and gas production business announced in 2015.

Stock Performance

B2BP’s stock stood at $35.57, falling 0.92%, at the close on Wednesday, July 6th, 2016, having vacillated between an intraday high of $35.59 and a low of $34.91 during the session. The stock’s trading volume was at 8,793,397 for the day. The Company’s market cap was at $109.15 billion as of Wednesday’s close.

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