Not only is demand for LNG rising but analysts say its
price could hit all-time highs within a few years.
Projects involving liquefied natural gas development are shaping
up as a major investment opportunity for those with a long-term
More than a dozen projects worth well over $100 billion have
been proposed. They may not all go ahead but a sufficient number
should proceed, providing a huge boost to the relevant
Woodside Petroleum has said that as its massive Pluto project
comes onstream, its LNG revenues could soar fivefold. Another
company, Oil Search, believes its planned LNG development in Papua
New Guinea will lead to a trebling of its annual oil and gas
LNG production is a complex and expensive process. It involves
locating gas deposits, then converting the gas to liquid in order
to transport it overseas. Australia has extensive gas reserves and
is set to become one of the world's leaders in LNG.
As a relatively clean source of energy, gas is increasingly
being called for by power suppliers around the world. In
particular, demand from the fast-growing economies of Asia is
stimulating much of the development work in Australia, although the
US – where gas reserves are dwindling steadily – is
also viewed as having long-term potential.
Not only is demand growing but prices could rise substantially,
providing a further boost to producers.
“We are very bullish on the oil price,” says a
resources analyst at Fat Prophets, Nick Raffan. “I can see it
easily back to its all-time highs within a couple of years.
"And that will take the LNG price with it, because that is
determined according to a complex formula based on the lagging oil
At present there are “three games in town” for LNG
developments, according to Tony Wiggins, the director of specialist
resources fund manager EIM Capital Managers, which runs the
Emerging Resources Company Share Fund.
The first is Western Australia, where Woodside expects LNG
production to begin at its $14 billion Pluto development in early
2011, and where a foreign consortium led by Chevron is proceeding
with the $50 billion Gorgon project.
The second is PNG, where Oil Search has about a one-third stake
in a $17 billion project led by ExxonMobil. Formal approval to
proceed with the development is expected by the end of the year,
with the first production in
2013 or 2014.
The third area of development is Curtis Island off Gladstone in
Queensland, with a series of major LNG projects, including an $8
billion scheme led by Santos and Petronas, based on the region's
coal seam gas with production possible from 2014. Arrow Energy is
also active in this region.
However, analysts caution that investors should be aware of
particular risks involved at Gladstone. “Coal seam gas is
actually very expensive to produce,” Raffan says. “You
need to drill a lot of holes for one production well. I worry about
how much the companies are spending on capital
Woodside is the key stock for investors looking to participate
in the LNG boom.
“It is very experienced,” Wiggins says.
“Woodside has delivered LNG for 20 years. It has an
incredible customer base and very meaningful volume growth coming
out of Pluto. That is worth something. Clearly, with larger,
experienced players who have been doing it for a long period of
time, the risk is less than with some junior players who have not
done this before.“
Oil and gas analyst at Hartleys, David Wall, says:
“Woodside has built four LNG trains [processing lines] in
Western Australia already and a fifth is 80 per cent complete. So
that operational risk is largely mitigated.”
He also rates Oil Search highly. “Oil Search is working
with ExxonMobil as operator and ExxonMobil has built a number of
LNG trains globally. Quite a lot of technical risk is associated
with the construction and operation of LNG plants and this can be
reduced if you are with someone with experience.”
He says investors with an appetite for higher risk should
consider companies that are exploring for gas near current LNG
developments. Two of these, Tap Oil and Roc Oil, have active
exploration programs in Western Australia.
Fat Prophets has a long-term buy recommendation on coal seam gas
specialist Arrow Energy.
Large construction contracts are flowing from the LNG projects,
with many more expected. A senior industrial analyst at Hartleys,
Trent Barnett, recommends looking at the beneficiaries.
From these he recommends Mermaid Marine Australia, which has
become Australia's largest provider of marine services to the
offshore oil and gas industry. “It is a very good
business,” he says. “It is getting a lot of work out of
Pluto and will get a lot more from Gorgon. It has a high exposure
He also recommends Decmil Group and Neptune Marine Services,
which both provide a range of engineering services.