LNG... The Ukraine factor

The Crimean conflict puts renewed focus on reliable gas producers in Australia and the US, despite the high cost of local production.

Summary: Local gas producers attract heightened interest as reverberations from the Crimea remind buyers of the risks of depending on Russia for gas supplies. While it is too early to know the consequences of the Ukrainian conflict, Australian gas exporters may secure additional contracts if concerns about reliability strengthen.
Key take-out: Woodside, Santos and the PNG specialist, Oil Search are well placed to pick up additional Asian customers if the Russian/Ukrainian conflict deepens, but US producers are still a significant threat.
Key beneficiaries: General investors. Category: Oil & gas.

The Ukraine is a long way from Australia but events there over the past week have eased some of the pressure on Australia’s high-cost LNG industry and might have opened the way for a future wave of developments.

The good news for Australia out of uncertainty in Ukraine is that Europe has received a third sharp reminder that it is overly dependent on an aggressive Russia for a large portion of its natural gas requirements.

That means there is heightened interest in a US entry into the European energy market via exports of gas from its emerging LNG sector – and reduced interest in the US selling its surplus gas into Australia’s backyard of Asia.

It is early days in what could be a significant shift in the global gas trading business and not cause for investors to load up with ASX-listed oil and gas producers.

But, it is a reason to not discount Australia’s gas-export sector out of concern that it has forfeited its edge after a bout of construction cost blow-outs and completion delays.

Leading gas exporters such as Woodside, Santos and the PNG specialist, Oil Search, are well placed to secure additional customers in Asia as emerging US-based rivals are put under political pressure to shift their focus to Europe.

It is logical that Australian LNG be preferred in Asia thanks to the shorter shipping distance, just as it is logical that the US become a preferred supplier to Europe because the bulk of the US oil and gas industry is centred on the southern states and Gulf coast which is within easy shipping distance of Europe.

Alaskan and US west coast gas can easily reach Asia but most US gas pipelines flow east and south.

What’s just happened in Ukraine is a reminder to gas buyers that reliability of supply, without political interference, is as important as price and while Australia’s reputation has been bruised by having the world’s highest oil and gas construction costs it retains its reputation for political stability and reliability.

The same cannot be said of Russia which has shown an alarming willingness to use natural gas as a weapon.

Asian buyers of gas will be closely watching events in Europe and while tempted by the prospect of sourcing potentially cheaper LNG from the US they now have an added security factor to consider along with the possibility that they have slipped down the list of markets being targeted by US gas producers.

Changes to what is a fluid situation included calls earlier this week for the US to speed up its government approvals process so LNG exports to Europe can be started sooner rather than later.

If that happens, and Europe becomes the preferred market for US gas, then threats made as recently as last week of a US gas-export push into Asia will lose their sting and Australian LNG projects will be given more time to rein in their costs and plan for possible expansion.

Because Europe relies on Russia for 30% of its gas requirements the Ukraine situation has deeply disturbed European politicians and business leaders, especially around 50% of Russia’s gas is delivered via pipelines which cross the Ukraine.

Source: Wikipedia

On two previous occasions, 2006 and 2009, Russia crimped pipeline supplies to Ukraine during disputes over the price of gas and claims of unpaid bills.

Europe was a secondary victim of the dispute because Russian action in limiting gas supplies to Ukraine meant they were also limited flows to Europe.

What’s just happened in Ukraine has been quickly followed by US politicians seeking to play Russia at its own game, using gas (the world’s preferred fossil fuel thanks to its relatively low pollution levels) as a way of attacking the commercial interests of Russia.

One of the most powerful politicians in the US, the speaker of the House of Representatives, John Boehner, said on Tuesday that: “one immediate step the president can and should take is to dramatically expedite the approval of US exports of natural gas.”

The US Energy Department is considering 24 requests for LNG export licences, with five new requests made in the past 12 months as US producers seek ways sell their gas at prices which can be more than double those at home – and sometimes much more than double.

Until the situation in the Ukraine boiled over with the Russian intervention of Crimea the primary focus of potential US gas exporters has been Asia with a former senior government employee warning Australian gas producers that competition was on the way.

That warning came only last week, before Russia’s Ukraine adventure started, when Rhanda Fahmy Hudome told a gas conference in Sydney that Australia risked losing revenue from gas exports if it failed to develop its resources to their potential.

Ms Fahmy Hudome, a former associate deputy secretary in the US Energy Department and now a Washington lobbyist, said US gas companies were looking carefully at Australia’s LNG projects and questioning whether they were too big and too costly.

She also delivered a blunt warning to the Australian gas export sector along the lines of “the Yanks are coming” by twisting an Australian expression “no worries, mate” into a warning “be worried, mate”.

“In the US we see demand (for gas) in Asia as the biggest bite of the apple for us. We intend to compete in that market,” she said.

Three days later Russia invaded Crimea and Europe was plunged into its biggest political crisis in years setting off alarm bells around the world.

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