How LNG Exports Almost Bankrupted Australia, Is the U.S. Next?Commodities / Natural Gas Oct 19, 2014 - 12:57 PM GMT
The world’s leading liquefied national gas (LNG) exporter is the tiny Arab kingdom of Qatar, whose 77 million tons per year (mtpy) account for 30% of global LNG exports.
When the U.S. begins exporting massive quantities of LNG in 2015, it will immediately be catapulted into a position as one of the world’s largest exporters as well.
But the U.S. won’t be No. 2. In fact, the current second largest LNG exporter is poised to take over the No. 1 spot this decade.
It happens to be a country on the other side of the world from the Middle East. And it’s about to leave Qatar (and the U.S.) in the dust.
Unless its domestic customers go bankrupt first…
Big Profits in LNG Exports
We think of the Middle East as almost one giant oil field, but the reality is that Arab nations also produce a significant portion of the world’s natural gas.
Nowhere is that more true than Qatar, a nation of 2,045,000, or about the population of New Mexico, crammed into a land mass the size of Connecticut.
For such a tiny country, it produces a surprising amount of energy, so much that natural gas and oil exports account for 60% of the country’s economy, according to the U.S. Energy Information Administration (EIA).
Its LNG exports of 77 million tons per year (mtpy) from 14 processing plants, known as “trains” in the industry, have made it the world’s largest LNG exporter since 2006, though a current moratorium will “freeze” its current output.
Australia plans to take that No. 1 spot away as soon as 2017, and export 85 mtpy in 2017 and 100 mtpy by 2020, according to government resource officials.
If it succeeds, its citizens will pay a terrible price.
In fact, they already are.
In its rush to capitalize on Asia’s insatiable demand for natural gas, which skyrocketed when Japan shut down its nuclear reactors in 2011, Australia began exporting the majority of its natural gas earlier this decade. Today, 75% of the natural gas produced in Australia is exported.
Asia’s willingness to pay two and three times what Australia’s domestic customers were paying for natural gas made the move a no-brainer for the country’s energy companies. And as the only natural gas producing country with no controls or limits on exports, according to DomGas Alliance, a consortium of Australian energy companies, there was nothing to stop them.
The consequences were predictable. With domestic supplies falling, prices rose to match the much higher export prices. After all, why should an energy company sell gas cheaper to domestic customers?
The average Australian household now pays three times more for natural gas than it did at the beginning of the decade.
According to Wood MacKenzie Ltd., an energy research company, wholesale purchasers in eastern Australia had been paying A$3 ($2.67) to A$4 per million British thermal units on average over the past decade. Now those prices are A$9 to A$10 per million Btu.
“Australia’s east coast gas market is now linked to Asian markets through its LNG export projects,” said Chris Graham, an analyst at Wood Mackenzie.
The result, University of Queensland energy analyst Dr Liam Wagner predicts, “In the future we’re going to have less gas because it’ll be far more expensive to burn it here and the gas producers will be able to make more money overseas.”
And it’s not just Australian homeowners who are suffering from higher prices. Manufacturing plants are closing, planned expansions are put on hold, and new plant projects are being cancelled, because of rising fuel costs.
Meanwhile, Australia has five new LNG export terminals due to open within the next year, and four more planned for 2016-2020. Without government export controls, Australia’s domestic customers will continue to see large price increases, even as production rises to make the country the world’s export leader well before the end of the decade.
Will U.S. Exports Cause Natural Gas Prices to Jump?
With the U.S. scheduled to begin exporting large quantities of LNG starting next year, will U.S. customers see the same large increases in natural gas prices?
Industry analysts say no.
For one thing, the U.S. extracts approximately 30 trillion cubic feet of natural gas every year, about 15 times what Australia produces.
The second factor is that even when the four LNG export terminals the federal government has approved are fully operational, the U.S. will, at most, only export 10% of what it produces.
In an ironic twist, one of those facilities was built in Sabine Pass, Texas, three years ago by Qatar, which planned to import natural gas into the U.S. In conjunction with Exxon Mobil and Conoco Phillips, Qatar and its partners want to spend $10 billion to convert into an export terminal.
When U.S exports begin begins in earnest, companies like Cheniere Energy Inc. (NYSE MKT:LNG) will be mainstays in a huge move of American-produced natural gas abroad.
Cheniere has locked in major 20-year export contracts from its terminals on the Gulf Coast. That explains why Cheniere, without having yet produced a single drop of LNG for export, has been on a tear.
Cheniere is up 42% since the first of the year, and 293% in the past two years. In the short term, the stock is affected by the movement of the energy market overall, but in the long-term the company’s lead in natural gas exports gives it a huge potential upside.
PS: Meanwhile, another “war” over a precious commodity is unlocking big opportunities for investors. Learn more here.
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