We are bearish on the markets as growth is slowing and the euro-crisis looks like it could escalate out of control. So we look for markets that are still booming and stocks that can profit from that.
One of the booming markets in the world right now is that of liquid natural gas (LNG), especially in Asia. A stock to profit from that is InterOil (IOC).
The authorative International Energy Agency (IAE) even speaks of a 'golden age' for natural gas. Asian economies are booming and many of the big cities are chocking in pollution. Stemming the rise of CO2 emissions increasingly plays a role in the rising demand as well.
Many of the big economies have to import most of their energy. Natural gas provides an answer to these problems, it's much cleaner than coal and much cheaper than oil. It's no surprise that demand for it is booming:
Thailand and Singapore will shortly commission their first LNG-receiving terminals, to be followed by Indonesia, Malaysia, Pakistan, Sri Lanka and possibly the Philippines. Within five years nearly all Asian countries could be importing LNG and we are seeing a similar picture in Europe, South America and the Middle East. Global LNG receiving terminal capacity was 350 million tonnes in 2005, 600 million tonnes in 2010 and could reach 950 million tonnes in 2015. [BBC]
China demand in particular comes from very low base:
Currently natural gas accounts for less than 5% of primary energy use in China and 10% in India compared with the global average of 24%
As a clean energy source, natural gas now only accounts for about 3 percent of China's total energy consumption. Globally, the figure is about 25 percent.
But compared with other fossil fuels, the use of natural gas has increased faster in China in recent years. The government plans to increase the use of natural gas to 5 percent of total energy consumption in 2010. [Chinadaily]
So there really is ample room for growth. Coal is still by far the largest source of energy production (more than 60%) and China builds new coal fired electricity plants at a fast pace. But although China has ample coal resources of its own, its use of coal has increased so much that it has begun to import coal (mainly from Australia), imports which are set to double in 2015.
Coal mines also experience a high accident rate in China and the pollution and CO2 emissions further put it at a disadvantage versus natural gas, in an age where the authorities increasingly have to deliver not only on jobs, but also on quality of life with protests over mine security and pollution increasing.
It is therefore not surprising that:
China, the world’s second-largest energy user, is building more than 10 LNG terminals on its eastern coast to meet a target of doubling the use of gas as an alternative to coal. [Bloomberg]
Neither will it be a surprise that Chinese energy companies like CNOOC (CEO), Petrochina (PTR) and Sinopec (SHI) have concluded many LNG import deals over the last years already. A complete list of these deals can be found on Bloomberg, it amounts to almost 40 million metric tons per year already.
And indeed, Chinese LNG imports are booming:
Chinese demand was also stronger, with imports at a new record of 1.18 million tonnes in July, up 13.5 percent from June. Imports reached 6.36 million tonnes in the first seven months of 2011, up 32.5 percent from a year earlier, according to the report. [Reuters]
And Then There is India
India’s trillion-dollar economy is already the world’s eighth-largest importer of LNG, and those imports could rise as much as five-fold in the next decade. [Firstpost.com]
Together, India and China will have a rather dramatic impact on LNG demand:
Demand for liquefied natural gas in China and India may surge more than sevenfold by 2025 as the nations boost their use of cleaner-burning fuels, said the chief executive officer of Santos Ltd (SSLTY.PK) [Bloomberg]
But the traditional big LNG importers are Japan and Korea. Demand for LNG got a further boost because of the Japanese nuclear disaster. This is causing a shift to fossil fuels for electricity generation not only in Japan but nuclear energy programs are re-evaluated in many places, like Germany.
Such is the need that the Japanese government is providing substantial funds to secure LNG supply:
In response to this circumstance, the Japanese government has established a policy to provide private corporations with financial support toward LNG exploration and development. The Ministry of Economy, Trade and Industry (METI) will sponsor about half of the necessary funds through Japan Oil, Gas and Metals National Corporation (JOGMEC). [Denki Shimbun]
The result is hardly surprising:
Bernstein estimated that “1 GW of lost nuclear capacity will require an additional one million mt of LNG to replace it.” They added that Japan will require “an additional 10 million mt of LNG in 2011, 14 million mt in 2012 and 12 million mt 2013 onwards.” [Naturalgasforasia.com]
It has a noticeable effect on world LNG demand, which is really booming:
Global liquefied natural gas demand was up 8.5% year on year in the first half of 2011 and is expected to grow by 12% for the whole year, driven by incremental demand from Japan, the United Kingdom and India, and continued growth from traditional buyer South Korea, according to a report prepared by Bernstein Research. [Naturalgasforasia.com]
And prices are rising:
Asian liquefied natural gas (LNG) spot prices for September rose to around $15.50 per million British thermal units (mmBtu) during the week, as strong demand in Asia continued to draw some cargoes from the Atlantic Basin. [Reuters]
Note, the enormous difference with natural gas prices in the U.S., where the Henry Hub spot price is around $5. The gas market remains regional, although this is slowly changing.
Against this booming demand, there is also rising supply, basically from Qatar and Australian LNG projects. But Qatar has a moratorium on LNG expansion (although there is some talk this might be lifted for the 2022 world cup football) and the Australian projects are very expensive, as these are unconventional gas like coal-seam gas, which has to be treated to make the wells flow in a manner similar to shale gas, or deep-sea projects like the $50B Gorgon project.
By around 2020, Birol said, Australian LNG production could increase threefold. The latest figures indicate that Australia exported $7.71 billion worth of natural gas in 2009. In 2010, it was the fourth largest LNG exporter after Qatar, Indonesia and Malaysia. The push to develop long-term supplies of LNG in Australia has sparked more than $214 billion worth of LNG projects. [upi.com]
Note the sums of the projects involved, because of the nature of unconventional gas. To give you an idea, the ConocoPhillips (COP) project needs to drill (treat and man) no less than a whopping 20,500 wells.
But apart from cost, coal seam gas is not without other problems:
An unconventional source of gas, coal-seam gas is about 98 per cent methane and is, therefore, drier and has a lower heating value than conventional LNG. Most analysts expect participating companies will have to offer a discount on their LNG to account for CSG's lower calorific value, especially in Japan, where some utilities have stricter quality control standards. [the Australian]
But against that, the region's traditional biggest LNG exporter, Indonesia, is reducing its export. Partly because they want to keep more gas for the booming domestic economy, but more importantly because its biggest field, Arun (discovered in 1971 and producing its first LNG in 1978), is drying up.
A sign of rising demand is also the re-emergence of very big off-take deals. In Asia, most of the LNG is traded in long-term bilateral off-take deals with complex pricing often tied to the price of oil. In the wake of the 2008 financial crisis, these deals were waning, but they have come back with a vengeance like:
- the $70B for Tepco from Chevron (CVX) for 3.1mtpa for 20 years,
- the $85B deal between Sinopec and ConocoPhillips/Origin, or
- the $84B deal between Shell (RDS.A), Total (TOT) and Kogas.
How to Profit?
We think that a company like InterOil is very well positioned to take advantage of the booming LNG demand in Asia. It's Elk/Antelope resource is large (8.59Tcf, according to GLJ), the gas is wet (there are 129Mbbls of condensates, according to GLJ) and its business model innovative (involving modular and floating LNG plants build and paid for by others in exchange for 14.5% of the gas revenues).
While we will expand the InterOil investment thesis in more detail in future posts, it is worth while to keep in mind that InterOil has the only project in the 2014-5 time frame that has its LNG not committed already. There seems to be plenty of interest, and there is some 20mtpa in demand interest for InterOil, according to the recent conference call.