Australia | Nov 08 2012
This story features ORIGIN ENERGY LIMITED.
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The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS
– Natural gas prices have risen since September
– Trend expected to be maintained through northern winter
– Brokers assess impact of US becoming an LNG exporter
– Australian LNG sector growing in international importance
By Chris Shaw
Since the start of October, US natural gas prices have risen more than 10%, this as a hot summer and the associated increase in electricity usage lifted demand by more than had been expected. This improvement in the market may continue as Hurricane Sandy has been a positive for prices given reduced nuclear capacity.
National Australia Bank expects prices will maintain their recent strength into the US winter, as by February in particular colder temperatures are expected to boost heating demand. But with the US market very well supplied, NAB cautions there is limited upside risk for prices even allowing for some signs of a supply response.
European natural gas prices have also risen since the middle of this year, helped by Qatar cutting deliveries to Britain to conduct maintenance work on two plants. Qatar is the major supplier to the British market.
The restarting of two nuclear reactors in Japan has seen an uplift in electric power generated from nuclear, but uncertainty as to further restarts means LNG demand from this market remains strong. Chinese LNG imports are also continuing to grow.
Accounting for these market developments, NAB expects Japanese LNG prices will continue to ease over the medium-term as the market adjusts to lower oil prices than earlier in the year, while Henry Hub forecasts have been lifted given stronger than expected consumption.
JP Morgan's monthly review of the natural gas market suggests in the US the trend of power generators moving increasingly towards natural gas at the expense of coal is likely to continue. This has prompted the broker to lift its price forecast for 4Q12 to US$3.50/MMBtu from US$3.25, though there is no change to the 2013 forecast of an average price of US$4.25/MMBtu.
Looking ahead, JP Morgan suggests the current forward curve has been broken into three segments. The prompt winter months are being driven by micro factors such as weather concerns, while the balance of 2013 is being affected by potential production declines and bands of price-driven demand elasticity. The longer-term period of 2014-2017 remains subject to commercial flows and macro factors.
One positive for the North American gas market in JP Morgan's view is that the strong demand coming from both Canada and Mexico appears somewhat impervious to general economic conditions. One threat remains a return to a global recession, as this would likely damage an expected improvement in industrial applications in the US.
The key for prices according to JP Morgan remains the producer market, where total rig count has been in decline through 2012. This implies less new supply and so a tighter market. While prices around US$5/MMBtu would likely be enough to bring most onshore basins into economic viability, the broker notes a risk to prices hitting this level remains a ramping-up of gas directed drilling.
Longer-term the view of JP Morgan is North America is likely to become an exporter of 3-4Bcf/day of LNG by 2017-2019, even with power generators moving increasingly towards natural gas at the expense of coal.
With the US to become an exporter of LNG in coming years, Deutsche Bank has attempted to assess the potential impact of US exports on regional LNG pricing. In the broker's view the risk for Australian plays is being overplayed, given most projects have existing contracts that will be unaffected.
The existence of long-term contracts means the only source of exposure to US exports is price-reopeners, which generally occur every 5-7 years in LNG contracts. But given the restrictive nature of price re-negotiation points, there is less scope for existing projects to be impacted.
As well, Deutsche notes with the Pacific Basin LNG market far from homogenous there is scope for different pricing benchmarks in different regions, while brownfields expansions are less exposed given better project economics and the ability to leverage existing production and customer relationships.
One thing that may change as the US enters the LNG market is for the market itself to move away from traditional oil-linked pricing, as US export prices are likely to be linked to Henry Hub prices. This would give Asian buyers some diversification but doesn't promise lower prices as Deutsche notes in all but three of the last 12 years, Henry Hub linked contracts would have been priced higher than oil-linked contracts.
What also protects Australian LNG producers is that buyers have been offered project equity states as a key contracting point. This also helps brownfields expansions, as this increases value in the buyers' project equity stake.
The other issue for US entry into the Pacific Basin LNG market is not all proposed projects will be successful and there is ongoing risk of US policymakers capping energy exports. This is causing LNG buyers to remain cautious.
To play the sector Deutsche continues to rate Oil Search ((OSH)), Woodside ((WPL)), Santos ((STO)), Aurora Oil and Gas ((AUT)), Karoon Gas ((KAR)) and Drillsearch ((DLS)) as Buys, while Origin Energy ((ORG)) is rated as Hold.
Australian LNG projects are gaining significance internationally, as French oil major Total has committed to making Australia a core operating region through a farm-in with Central Petroleum ((CTP)) in the Southern Georgina Basin in Queensland and the Northern Territory.
The deal with Central Petroleum will see up to US$190 million invested over a three-stage project, with Total to contribute 80% of this to earn up to 68% of six million acres in four permits. Eventually Total will also be the operator of 90% of the joint venture acreage.
The deal means Total joins the likes of Mitsubishi, CNOOC, ConocoPhillips and BG Group to farm into the Australian unconventional space. The deal adds to Total's 30% interest in the Ichthys LNG project and 27.5% of the Santos operated GLNG project.
In the view of JP Morgan, the move by Total may see the likes of Beach Energy ((BPT)) and Senex Energy ((SXY)) consider farm-outs as a means of funding further unconventional developments. To date, JP Morgan notes farm-in partners have yet to pay more than option value for acreage positions.
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