In 2011 the International Energy Agency (IEA) published a special World Energy Outlook report entitled “Are We Entering a Golden Age of Gas.” Here is the opening paragraph from that report:
The future for natural gas is bright. Demand has experienced a strong post-crisis recovery, while the North American shale gas boom and expansion of LNG trade have made ample supplies available in the near-term and bolstered future gas supply prospects. With mounting concerns over energy security and global climate change, and renewed debate surrounding the future role of nuclear power, these developments merit a deeper investigation of the prospects for, and the implications of, a golden age of natural gas.
Here in Australia there was rampant speculation this Golden Age of Gas could follow in the footsteps of the once dominant mining boom, adding a much needed boost to the economy. Australia was forecasted to overtake Qatar as the world’s leading exporter of Liquefied Natural Gas (LNG) with major oil and gas producers from around the world developing massive LNG joint venture projects in Australia.
Cost overruns and delays plagued many LNG projects and then the once bright skies for the sector began to cloud over. LNG pricing in Australia is linked to the price of oil. Long term contracts are standard practice and are in place before product is ready to be shipped. The unanticipated crash of oil prices in 2014 called the coming of the golden age into question. Flash forward to March of 2015 and the IEA’s Medium Term Gas Market Report added new worries.
Despite the positive spin from the 2011 outlook the global demand for gas slowed down in 2013 and continued to 2014. The 2015 Report forecasted average growth of global gas demand at 2.0% from 2014 to 2020. For the preceding decade growth had averaged 2.3%
Flash forward yet again to 2016 and the IEA lowered its growth forecast through 2021 to 1.5%. The proliferation of LNG production and exporting facilities puts the market in over-supply status in the face of diminishing demand. This may explain the investor response to the news coming out of Origin Energy (ORG), one of four ASX stocks with substantial LNG assets in partnership.
Right now there are four joint venture LNG facilities in operation with ASX listed Oil and Gas Producer partners. Origin Energy has a 37.5% interest in the Asia Pacific Liquefied Natural Gas project (APLNG), matched by the operating company – US based Conoco Philips. The remaining 25% is owned by China’s Sinopec.
APLNG began shipping in December of 2015. On 29 July Origin announced its oil and gas production for the Full Year 2016 was up 57% with revenues climbing 15%. The company claims APLNG shipments contributed to the result.
Perhaps investors were waiting to learn how much of a contribution came from APLNG and how Origin’s utilities businesses performed when the full financial results are released in the coming months. The reaction to this announcement, which came after the close of the market on 29 July, was a brief burst of enthusiasm followed by a return to earth. Here is a price performance chart for ORG.
Woodside Petroleum (WPL) traces its history with LNG back to the North West Shelf Venture, where as operator Woodside oversaw the first LNG shipments back in 1989. Patient Woodside shareholders were rewarded when the company’s Pluto LNG project went into production in 2012, rewarding investors with price appreciation and special dividends. The share price on 1 May of 2012, when Pluto began producing, was $26.34. The share price eclipsed $39 in September of 2014, right before the global collapse of oil prices began.
Woodside cancelled development of its Browse LNG project and its joint venture with Conoco Philips for a Floating LNG operation at Sunrise is in question. The latest IEA report noted the shriveling of investment in future LNG projects.
The other ASX LNG players include Santos Limited (STO) and Oil Search Limited (OSH). Santos is a joint venture partner with Conoco Philips in the Darwin LNG operation, which began shipping in 2006 as well as in the Gladstone LNG (GLNG) operation which began shipping in September of 2015 with a second production operation (train) going into production on 26 May of 2016. Santos is the site operator and majority partner with 30% ownership.
Santos also holds a 13.5% interest in the Papua New Guinea LNG project (PNG LNG) along with Oil Search with a 29% interest.
All four of these companies are looking for big returns from LNG investments. Origin Energy is the only company with no oil assets; while the other three stand to benefit from rising oil prices. However, the big returns may be a long time coming. In November of 2015 analysts at Goldman Sachs painted a bleak short term picture, pointing to lower prices leading to some buyers looking to break or renegotiate existing contract prices. Goldman cut its 2016 price forecast by 13% and pointed to the possibility of an additional 23% drop in LNG prices by 2018.
Bargain hunters may be tempted here as some of these stocks are trading near multi-year lows. The following table looks at current share prices and historical rates of shareholder return for these four companies.
Less than a decade ago, some experts were predicting oil at $200 per barrel. For half of the last decade oil has traded above $100 per barrel. Here is a 10 year price chart for Brent Crude.
Over that period only one ASX Oil and Gas Producer – Oil Search Limited – showed a positive total shareholder return. One could make a very strong case that a large contributor to the less than stellar performance here was the construction delays and cost overruns. Woodside’s Pluto was deemed a success once it began producing but it opened two years late and billions over its construction budget.
At this point two of the four are poised to reap the rewards of their LNG investments that are recently operational. Unfortunately, this comes at a time when the US will be exporting LNG along with our own outsized supplies at a time when demand is weakening, yet some analysts are optimistic about Santos and Origin based on their LNG entries that are less than one year old.
While investors in large part appear to have given up on LNG, some forecasts would seem to indicate it can fulfill its role as a transitional fuel. Amidst the hype it is easy for many to forget that LNG is a fossil fuel transformed into liquid and then returned to a gaseous state. LNG plants, or trains, need gas to liquefy. Origin benefits not only from its holdings in the LNG trains but also from its role as a supplier of natural gas from its highly controversial coal seam gas operations. In addition, Origin benefits from other emerging players in the energy mix – renewables.
On 16 June Bloomberg New Energy Finance put out its annual New Energy Outlook: Powering a Changing World report. The report states the price of natural gas and coal will remain cheap but contains some surprising projections for the much maligned renewable energy sector. Many investors have been skeptical about the potential of renewables as historically they have not been price competitive without government subsidies. The following chart may come as a surprise to those investors.
Annual electricity output by the major generating technologies, 2016-40, thousand TWh
You can see that electricity output from coal and natural gas will peak around 2027 to 2028 and then level off. Wind and solar, according to this report, will overtake Gas by 2028 and coal by 2037.
The good news for LNG and Coal producers is the report’s conclusion that the price of coal and gas will decline more than forecasted in the 2015 report, leading to increasing use of both fuels.
The bad news is the sharp drops expected in the cost of renewables. Generation costs for onshore wind will drop 60% by 2040 with solar expected to fall 41% over the same period. The report concludes the declining price of wind and solar will make these renewable forms of energy the most cost effective way to produce electricity in many countries during the 2020’s and for most of the world in the following decade.
Gas is Origin Energy’s principal fuel for its electricity generation business, but it does have renewable assets in place, most notably solar installations and wind farms. The company believes solar is a better bet for the future and recently sold off its geothermal assets and one of its Australian wind farms, with another wind farm to be sold later this year. US based electric vehicle manufacturer Tesla Motors (Nasdaq GS: TSLA) is aggressively pursuing improved battery technology. The company entered into an agreement with Origin to offer its home battery storage system, Powerwall, here in Australia. Powerwall is a home battery that stores energy produced during the day to power a home at night. In addition, the system provides a backup electricity supply. Powerwall charges from solar panels and stores the electricity. The Powerwall battery can be added to existing solar panel systems as well as in new installations.
Origin is committed to restoring shareholder value and there is talk of a possible demerger, where Origin would split off its LNG and other gas assets to focus exclusively on electricity generation. A possible merger of Origin’s LNG business with Santos is also making the rounds of the financial press. That is a lot of uncertainty for the average investor, but in the long term Origin will benefit from the increasing use of solar generated electricity as well as the medium term benefits of increasing revenue from its LNG assets.
The information in this article should not be considered personal advice. The article has been prepared without taking into account your objectives, financial situation or particular needs. Before acting on the information in this article you should consider the appropriateness of the information, with regard to your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article.