The Battle Between LNG and Oil Begins Published Wed, Oct 22, 2014 | Karim Rahemtulla, Chief Resource Analyst
LNG and Oil Battle for Dominance of Energy Market
Imagine yourself in Australia or Qatar, two of the top liquid natural gas (LNG) exporters in the world. You’re living it up, selling LNG to energy-strapped Japan for $15 per million British thermal units (BTUs)…
But then, natural gas from the United States sells for a November delivery for about $4 per million BTUs on the New York Mercantile Exchange.
This price is outrageously low, especially when you consider the cost of transforming natural gas into a liquefied state, then freezing the liquid, and shipping it to the other side of the world.
Suddenly, your cushy export business is devastated.
When the United States joins the LNG export fray late next year, this nightmare might turn into reality.
America will likely send LNG to Japan and other big importers for close to $10 per million BTUs, a third of current prices.
But this is just the beginning of the global energy battle.
And an unexpected threat is rising to the frontline…
Shots Fired
That threat is the unexpected plunge in oil prices.
At a recent gathering I attended in London, LNG producers were seriously concerned by a continued decline in oil prices.
You see, for LNG producers, the price of natural gas isn’t really a competitive threat… but the price of oil is. That’s because oil is considered the substitute energy source for LNG, not gas.
At this point, I’m sure you’re aware of the flooded oil market and dropping prices.
The maximum pain point for LNG producers is around $60 per barrel of oil, and a little higher for those in Australia and Qatar.
On top of the oil menace are some concerning comments from Malaysia.
Malaysian energy powerhouse Petronas (PETDAG) and British Columbia are partnering to build a multi-billion-dollar LNG facility in northwestern British Columbia.
But Petronas isn’t happy with the cost projections for the project. It warned the Canadian government that it would delay the project by 10 to 15 years unless costs are reined in.
This may sound extreme and like posturing on the Malaysians’ part (who are the big money in the deal).
But their reasoning was quite simple: They expect the landscape to be much more competitive in the coming years.
In other words, they expect LNG prices to fall.
The State of the Troops
This seems like bad news for LNG-exporting companies like Cheniere Energy, Inc. (LNG), the U.S.-based darling of the sector.
Shares plunged by more than 25% during the recent selloff (twice that of the energy index), but they’re still up more than 50% for the year.
The selloff was, in my opinion, quite valid. I wouldn’t be surprised to see shares fall further if the price of oil continues lower.
Cheniere has several multi-year, multi-billion-dollar contracts to export LNG, but it has yet to ship a single BTU of anything from its Sabine Pass facilities in Louisiana.
Of course, a further selloff of LNG producers and exporters would also represent an opportunity, especially if prices reached levels likes those from a couple of years ago (when the hype around LNG was less frantic).
LNG is here to stay, and companies – such as Woodside (WOPEY), out of Australia – are going to keep making money.
The question is: How much will they make once U.S. production comes online?
If there’s too much competition from other sources like oil, extra supplies of LNG could injure the industry before it gains ground.
And “the chase” continues,
Karim Rahemtulla
Poster Comment:
There has been talk of turning trucks into burning LNG instead of diesel. This would be a massive undertaking, similar too mobilizing the nation to fight WW II.
In Chicago, the gas company trucks burn LNG, so the technology does exist. ;)