Natural gas has become even more desirable after the Australian government unveiled a plan to pass a carbon tax, which should boost demand for natural gas, since natural gas is a cleaner source of energy than coal.
The last International Energy Agency (IEA) report paints a rosy picture for both supply and demand in coming years. News is particularly good for Australia, ‘We think Australia will play a crucial role in the golden age of gas,’ said IEA Chief Economist Fatih Birol, the lead author of the report. Some of the major findings are:
• By 2020 LNG (liquefied natural gas) production could increase threefold
• LNG would contribute almost $40 billion dollars a year to Australian economy, an approximate 400% increase from current value
• Global demand for gas is expected to increase by 50% in the next 25 years.
Nevertheless, environmentalists are irritated because extracting more natural gas comes at the expense of destroying local water reserves, flora and fauna. Australian farmers are outraged because natural gas wells are being built on their land without their consent. Furthermore, the leaks make the water undrinkable and even worse, combustible. On the other hand, natural gas is projected to have a major positive impact on the Australian economy.
From an investors’ perspective, the natural gas market is not as straightforward as that of other commodities, like coal or gold. Natural gas deserves our attention because there have been novel developments in the industry. New exploration sources and technologies have strong proponents (governments, private companies) and opponents (environmentalists, land owners). On the bright side, new technologies made it possible to drill natural gas from unlikely places and transport it over long distances via ships.
Large investors are taking notice – so far $214 billion has been poured into LNG projects. Shell, one of the energy sector heavy weights, has pledged $50 billion over the next 10 years. One major project is Gorgon in Western Australia – a joint venture between Exxon, Chevron and Shell. Other big projects are Pluto, Gladstone and Queensland Curtis.
I won’t be surprised if eventually Australia will become the largest LNG producer in the world. For now Australia is the world’s fourth largest LNG exporter behind Indonesia, Malaysia and Qatar. The nation down under exported 18 million tons in 2009-2010 to Asian countries, worth $7.8 billions. Although currently Japan is the largest importer, China is expected to take its place in the long run because of projected increased demand.
As you can see, LNG ranks number three after liquefied petroleum gas (LPG), also known as liquid propane gas and uranium. Australia entered the natural gas export market in 1989, shipping LNG produced from fields off the coast of Western Australia to Japan. Seven years later a second export project started in Darwin in the Northern Territory, sourcing gas from the Timor Sea.
Currently there are two LNG processing plants in Australia: the North West Shelf (NWS) LNG Project in Western Australia and the Darwin LNG plant. Several others are under construction.
Another source of LNG is offshore gas fields, which produce floating LNG (FLNG) via a barge-like floating facility. Basically drilling facilities are places on large boats, which are anchored over the fields, liquefy the gas and then offload it to LNG carriers for export to market. This amazing technology eliminates the need for pipelines and the risk of a land-based LNG plant running out of gas reserves: the boat can simply sail to another gas field when the first one is depleted. We have yet to see the FLNG – the world’s first FLNG project was just authorised in May 2011 and it is going to be located 200 km off the coast of Western Australia. Other projects are under way.
It is obvious that Australia needs more natural gas, for its own consumption and for exports. Although Australia’s energy consumption continues to increase, the rate of growth has slowed over the past 50 years. Furthermore, since the 1990s, domestic energy consumption has increased at a slower rate than production has.
Therefore, at current rates of production, Australia’s energy resources are expected to last for many more decades: 68 years for conventional gas and 100 years for coal seam methane (CGS). Currently there are no CSG-LNG operating projects anywhere in the world; therefore, Australia can export more LNG if it figures out the solution to this dilemma. Two of the obstacles faced currently by LNG projects in Australia are the increased exploration costs and the paucity of skilled workers. A 10 to 30% cost increase could decrease the value of a CSG-LNG project by almost 50%.
What in the world is LNG? It is natural gas that has been cooled at a temperature of minus 161°C to reach a liquid state. The liquid form is more compressed, with a volume 600 times lower which allows for easier transportation, meaning it can be shipped for long distances in specially built tankers, instead of traditional transport via pipelines. Since LNG in its liquid form is not inflammable or explosive, its transportation is considered very safe. Once it reaches its destination, LNG is re-gasified.
LNG is particularly important for trade between countries that are separated through big bodies of water, such as an ocean. LNG has two sources: conventional methane gas and coal seam gas (CGS). As the name suggests, conventional gas is the oldest form of gas and currently makes the bulk of the global gas production. Nevertheless unconventional gas has become more prevalent than ever before, with more unconventional sources developing in Australia, China and North America. Unconventional gas made up 10% of Australia’s production in 2008 and it is projected to increase to 45% by 2035.
For the period from 2015 and 2020, there are four countries that have 75% of the new LNG projects – Australia, Russia, Nigeria and Iran. However, so far only Australia has firm plans in place and not much progress is expected from the other three countries before 2020. Australia needs the unconventional (CGS) gas because most of the conventional gas is located offshore and in remote areas, making the task of bringing it to market difficult.
The main impediment to developing a gas resource is often reaching the market. Large gas discoveries can justify dedicated pipelines or integrated LNG projects, but smaller discoveries do not. However, there is hope that new technologies will make smaller projects more feasible in the next few years.
All right, you may say, what all this has to do with me? If nothing else, new natural gas fields and LNG exports may mean a lower electricity bill or more job opportunities. Furthermore, if natural gas becomes mainstream automobile fuel, maybe less money will be paid at the pump. However, if you don’t want to wait a few years to see how the new developments pan out, you can get involved now by considering trading shares, futures, options, ETF or CFDs.
In Australia, producers and hedgers trade natural gas in three different and relatively isolated spot markets. Recently, wholesale (read: not for individual investors) futures and options contracts have become available on ASX. For retail investors there are indices that comprise energy and utility companies: resources (symbol XJR) and energy (symbol XEJ). Most futures brokers allow you to trade futures and options natural gas contracted and traded on New York Mercantile Exchange (NYMEX). Most Forex brokers offer CFDs on energies, including natural gas. As always, there are the shares of the companies involved in exploration, drilling and transportation. Some of the major ones are Santos (STO), APA Group (APA), Origin Energy (ORG), Woodside Petroleum (WPL) and BHP Billiton (BHP).
Although natural gas is traded on exchanges in Canada, USA and Germany, its price differs from exchange to exchange, reflecting regional supply, demand, and unique factors. For the last few years I have been trading natural gas futures and options contracts available on NYMEX (symbol NG). This contract’s price has been influenced by the shale gas discoveries, seasonality of utility companies’ purchases, weather patterns in the Gulf of Mexico, and of course, speculation.
As you can see on the monthly chart below, Bollinger bands are closing in, and natural gas seems to have found a bottom for now. From this perspective alone, a rebound is plausible at least for the short term. Although other commodities, such as crude oil, have recovered nicely from the 2008-09 recession, natural gas has not yet recovered because of the massive quantities that are expected to be drilled in the next decades. If I were the CEO of a natural gas producing company, I would definitely be worried about this declining price trend and the impact of bringing more natural gas to the market on the bottom line.
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