Liquefied Natural Gas Goes Boom!

Even before the Tohoku earthquake and tsunami reminded the world that nuclear power is not risk-free, the liquefied natural gas (LNG) market was booming in Japan. In fact, the LNG market has been booming throughout Asia for the last several years. That’s good news for Australia…and for a variety of companies that serve the LNG industry.

Natural Gas Consumption in Non-OECD Asia, 2005-2030

Currently, Japan is the largest buyer of LNG. Japan and South Korea together make up 53% of current global regasification capacity. (That is, the ability to import LNG and turn it back into a gas for consumer and industrial use.)

Pressed against this new demand is an aging supply base in places. For instance, there are old LNG fields in Malaysia and Indonesia coming to the end of their useful lives.

So how will the market meet this surge in Asian demand? That’s where LNG from nearby Australia comes in. It’s hard to miss this story when you take a look at the Australian resource markets. It’s in the papers nearly every day. And the amount of money flowing into these markets is just staggering.

The Gorgon Project alone – a joint venture between Exxon Mobil, Chevron and Shell in Australia – will cost some $50 billion to develop. It already has supply contracts from India and China worth $60 billion and will surely get more contracts before the gas starts flowing in 2014. There are other firms pushing ahead with aggressive LNG ambitions. Woodside Petroleum, an Aussie oil and gas company, wants to be the leader in LNG by 2020.

As a result of all this activity, Australia will challenge Qatar as the world’s largest LNG exporter. “The numbers are phenomenal,” an Aussie analyst remarked about his country’s LNG growth curve. “When you look at them, it’s mind-boggling. It’s going to be LNG boom times.”

Asian buyers love Australia LNG because it’s close…and secure. The gas doesn’t have to pass through the war zones of the Middle East or the pirate-infested waters off Somalia. For most buyers, Australian gas doesn’t even have to pass through the congested Straits of Malacca, either.

Australia has lots of offshore natural gas. Explorers continue to find sizable new discoveries, which means new projects will come on board over the next few years. Most of these are in Western Australia’s waters. But Queensland also has sizeable nat gas deposits, as well as big reserves of coal seam gas. This is naturally occurring methane trapped by water deep underground. Coal seam gas also can be converted to LNG.

The big energy companies are already moving in. Shell, BG Group, ConocoPhillips and Malaysia’s Petronas are among those developing projects in Queensland. The growth in LNG production from Queensland alone has tripled in recent years.

With all these projects, it’s quite possible that in the next decade, LNG will surpass coal as Australia’s most valuable export. The government is certainly supporting LNG projects – it will add a gush of tax revenues to its coffers. Look at what oil did for the Middle East; the same kind of thing could well happen for Australia.

The best way to play LNG, in my view, is to own the companies that put together the Erector Set that LNG needs to operate. There are cold boxes that turn the gas into liquid. There is special insulated pipe. There are storage systems. There is a whole complex of stuff that has to be put together.

By owning one of the companies that makes all of that stuff, you don’t take on the enormous risk that goes along with any one production project. I mean, $50 billion (the latest estimate) for Gorgon is a gargantuan bet – too big for any single oil company to go it alone, hence the joint venture. And then there is price risk – no one can say what the LNG will sell for or what kind of returns it might generate.

It’s simpler to own the companies that put it all together. They will enjoy fat cash flows and swollen order books for years to come. One of my favorites here was Chart Industries (NASDAQ:GTLS), which I recommended to the subscribers of Capital & Crisis early last year. The stock has more than doubled since then, so it is not the screaming buy it used to be. But I still consider Chart to be a very solid, long-term investment.

Chart makes the mission-critical LNG equipment that all these projects need. The company is No. 1 or No. 2 in all of its markets – important in a business in which failure of equipment is not an option. Chart is still a small company in a fragmented market. Meaning it can get a lot bigger.

But Chart is just one example. The growth of the LNG market throughout Asia will create innumerable investment opportunities. Watch this space!


Chris Mayer,
for The Daily Reckoning

The Daily Reckoning