ERRATUM The Global Gas Race

This story features ORIGIN ENERGY LIMITED, and other companies. For more info SHARE ANALYSIS: ORG

In yesterday's article, The Global Gas Race (see below), the suggestion was made that Citi analysts believed Origin Energy would "ditch" a second train at APLNG. This interpretation was incorrect. The suggestion made by Citi was that Origin might initially move to a financial investment decision (FID) on one train only, while having enough gas for two. The story also stated there are six trains at the North West Shelf, while there are only five.

The article has been amended accordingly.

– LNG is set to benefit from a global nuclear back-down
– Shell is investing heavily
– The US has approved shale gas exports
– The race is on to meet Asia demand or fall by the wayside
 

By Greg Peel

Recommended reading: The New Global LNG Dynamic; LNG: Here Come The Yanks.

Origin Energy ((ORG)) is attempting to shore up funding for a second LNG train for its Asia Pacific (APLNG) project in Queensland. To that end it has just successfully raised 500m euros via a London-listed hybrid issue which Citi suggests should stave off the need for the company to raise dilutive equity, at least until FY13. Even then, Citi believes Origin will still need to find a partner(s) to take an equity stake in a second train.

The news simply reinforces the reality that LNG projects are extremely costly, take an awfully long time to ramp up, and as such require long term sales agreements to be in place in order to make their construction viable. These in turn need confirmation of sufficient gas reserves. But given expectations of an accelerating LNG demand curve in emerging markets, particularly China and India, should long suffering investors in Australia's LNG fortunes be concerned?

China's gas demand, notes Deutsche Bank, now exceeds that of the UK and that of Germany, but this “only hints at the large demand increases projected over the next five years,” the analysts suggest. China, and also Europe, will increasingly need to draw upon a common source of supply, being Central Asia. If that's not enough, energy analysts at UBS have now increased their earlier incremental global demand increase for gas as a result of nuclear closures, a result of Fukushima, by 50%.

UBS is somewhat perplexed that Germany would choose to close down all its nuclear reactors over time given many are young and feature modern, low-risk designs which could easily withstand floods or earthquakes. Older reactors in Switzerland or the UK would be more obvious choices, UBS suggests, as would some French reactors in questionable locations. Germany has none of these issues, which makes the decision purely a political one. Switzerland is planning to phase its reactors out as well, and what of Belgium and Spain? UBS sees 11GW worth of European closures out to 2013. Japan closed 15 of 55 reactors post-quake and not one has received approval to restart despite annual refuelling. Because they are too dangerous? No, because of local government opposition.

It is now the traditional maintenance season for US reactors, notes JP Morgan, but an “extraordinary” number are currently off-line.

This is, of course, all bad news for the uranium industry but good news for the natural gas industry given gas power is the obvious substitute for nuclear power. Gas is currently cheap and known to be abundant, oil is expensive and believed to be limited, and while coal is abundant the carbon emission issue may yet render coal power expensive. China is still building coal-power plants at ridiculous rate, but it is also continuing to build nuclear reactors and is ramping up its regasification capacity with the view to importing more LNG.

Royal Dutch Shell clearly believes gas is the future, given it has just committed to building a US$10bn floating LNG platform off the WA coast. It is a massive project, and a project of the future. Not so futuristic is Shell's Pearl facility nearing completion in Qatar. Again a project of enormous scale, Shell plans to turn Qatari gas into diesel at Pearl using 1920s gas-to-liquid technology. The facility should be fully operational in mid-2012 when it will provide 8% of Shell's energy output. As of next year, Shell will be producing more gas than oil, reports Investment U.

Interestingly, it is only the current high price of oil which makes the project viable. Shell began building Pearl in 2006, and industry experts ponder whether the company would choose to build Pearl today, even though oil prices are higher, given a significant increase in capital costs. If you have a rich gas field, as Shell does in its joint venture with state-owned Qatargas, then today you would more likely turn that gas into LNG rather than diesel, those experts suggest.

Adding Shell's LNG plans in Australia, including its floating LNG project, to other planned Australian projects means that Australia's liquefaction capacity growth rate will take over that of Qatar's – which boasts several LNG “megatrains” – in the next ten years, JP Morgan reports. Shell alone will be investing US$30bn, including the US$10bn FLNG investment.

JPM calculates that Australia was the second largest non-Asian exporter of LNG to Asia in 2009, behind Qatar. Aside from the attraction of Australia's abundant gas fields, local and foreign investors see the benefits in exploiting Australia's close proximity to the Asian region. Which brings us to US shale.

US authorities had been debating whether or not, in a time of diminishing US energy security, local gas producers should be allowed to export valuable US gas as LNG to the rest of the world. As the world's biggest consumer of oil, the US is the world's biggest importer despite its own production in the Gulf of Mexico and elsewhere. And despite importing most of its oil from friendly Canada and Mexico it still needs Saudi Arabia, Venezuela, and then some of its serious enemies as import sources. If sources of oil are indeed diminishing at a time when emerging market demand is exponentially growing, then the US will need to rely even more heavily on Arab and Persian production in the future.

Unless it turned more decisively toward its own abundance of natural gas. But no – better to export that. Last month the authorities gave approval for a company called Cheniere to be the first LNG exporting cab off the rank and given existing storage tank and port infrastructure in the Gulf, the company believes it can have its first LNG away in 2015 – one year earlier than global analysts had pencilled in for the first US LNG exports. The Cheniere green light should be the trickle that turns into a flood, given the number of shale gas companies in the US (including one BHP Billiton ((BHP))) eager to get moving.

Aside from the delay of supply from most projects until 2016, and assuming Cheniere's date is ambitious, the US still has a proximity problem. It costs more money to get LNG from the US (Gulf) to China than it does from Australia, for example. Citi believes Cheniere has the jump however, given its aforementioned existing facilities will lower its landed gas price in China to a comparable Australian price of US$64/bbl of oil equivalent. (Note that LNG is priced as a ratio to the oil price).

Even if the US gas spot price was to rise to US$6/mmBtu (as the forward curve suggests) from US$4/mmBtu (spot) where it is now, notes Citi, that price would still only be a comparable US$75/bbl.

Not all US shale gas LNG producers will have that advantage, and not all will be up and running by 2016. Yet from 2012-15, the first of Australia's new LNG projects now under various stages of completion/approval will be ramped up and a new wave of Australian-produced LNG will hit the global market.

At present the world is suffering from a gas glut from previously ramped up projects in Australia and Qatar in particular (as well as traditional suppliers such as Russia and the North Sea) which has exceeded the demand growth curve in emerging markets. That curve is nevertheless catching up fast, such that Australian projects ready in 2012-15 will meet significant fresh demand. By the time US shale becomes a significant source, we'll fall back into glut again, until even further down the track when once again that demand curve catches up.

But “even further down the track” is not good enough for a lot of planned projects in Australia which will miss the first demand growth window. To be viable, they must be looking to reach financial investment decision (FID) status fairly soon, which means proving up sufficient gas reserves and finding sufficient long term customers. The costs and the risks are just too much to consider when the time frame is too long. At present, even the 2012-14 window projects are struggling with funding issues, sales contracts and equity partners, as the above news on Origin's APLNG would attest. Bear in mind Origin is pitching for a second train.

Irrespective of the added gas demand a slowdown in global nuclear ambitions might herald, Citi sees too many options for buyers ahead. The analysts believe Origin will end up moving to FID on only one train at this stage, even though it has enough gas for two. And time is running out for projects such as Woodside's ((WPL)) Browse. We recall that Woodside is still struggling to get to FID on a second train at Pluto, things are going so well in PNG for Oil Search ((OSH)) and Santos ((STO)) that analysts are contemplating trains three and four, North West Shelf has five trains, Gorgon is massive, Shell's planning FLNG, let's not forget Santos' Gladstone project, as well as Arrow's Fishermans Landing, and, and, and, need I go on?

All of this in the face of eventual exports of US shale LNG, of pipelines to China planned from Turkmenistan and even Russia, Qatar's vast reserves, the other half of Qatar's reserves owned by Iran, a big gas field discovered off India, and the fact China hasn't even started looking for shale in its own back yard yet.

How are you looking with your current portfolio of Australian LNG gas producers and hopefuls? Getting impatient yet? It's all going to come down to timing, because first movers will win big and slow movers will fail.
 

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