Now gas turns on coal

BHP and Rio Tinto are in the firing line as LNG players take the high moral ground.

Summary: Gas industry leaders have launched a surprise attack on coal this week. While it was an attempt to elevate gas to a higher moral level than coal in the global climate change debate, it also revealed how tough it is becoming to sell gas at a reasonable price and was a reminder that LNG could be a disaster waiting to happen.

Key take-out: Gas producers appear to have decided that it’s time differentiate their products from coal as they try to win market share in the battle to sell energy. Investors should be wary about companies exposed to these energy sources, like BHP and Rio Tinto.

Key beneficiaries: General investors. Category: Commodities

If a fossil-fuel war started this week when gas industry leaders launched a surprise attack on coal, then investors should be wary of companies exposed to both coal and gas – with BHP Billiton the top of that watch list because it has a foot in both camps.

Low prices for all forms of energy are hurting everyone and while coal was the target at the World Gas Conference in Paris the remarkably hostile nature of the criticism said as much about the outlook for gas as it did about coal.

Australia’s leader in the gas blitz on coal was the chief executive of Woodside Petroleum, Peter Coleman, though he was not alone.

The most aggressive comment came from Patrick Pouyanne, chief executive of Total, a big French oil company, who told the gas conference that: “the enemy is coal”.

Coleman echoed that view when he said, “Our (gas) industry has historically been too timid to address the shortcomings of coal, but now it’s time to stand up and we need to stand united”.

That rallying call was cheered by gas-industry delegates for obvious, and not so obvious reasons.

Firstly, it was an attempt to elevate gas to a higher moral level than coal in the global climate change debate, an important move given that the next climate-change summit will be held in Paris later this year. Pouyanne and Coleman were, in effect, speaking to a home crowd.

Secondly, it revealed how tough it is becoming to sell gas at a reasonable price in a market on the cusp of a flood of as new Australian liquefied natural gas (LNG) projects hit the market, the US gets ready to join the LNG business and Russia starts work on a pipeline to China.

Thirdly, it was a reminder that one of the world’s most successful short-sellers, Jim Chanos, warned last month that LNG was “a disaster waiting to happen”.

Chanos, who runs the $US2.5 billion Kynikos short-selling fund, made a fortune shorting Enron in 2001, and this time he has some of the world’s major oil and gas companies in his sights, including Royal Dutch Shell, its takeover target, BG Group, and Chevron.

His criticism was based on an argument that demand for LNG had been flat for the past three years while capacity was “going to skyrocket”.

It is unlikely that Chanos was mentioned at the Paris gas conference but what he told investors last month will have been a factor in gas-company executives deciding that they needed a new marketing tool and that meant attacking coal.

What’s happening is a classic case of energy supply overwhelming demand because the extra gas is being produced at a time of sluggish global economic growth.

Gas, coal, oil, nuclear, and even renewables are fighting over the same customers in a brawl which will produce the inevitable result of a win for the power source with the best business case, and that’s a test which will include clearing environmental and political hurdles.

Energy coal, the lower-grade material burned to generate electricity, is the most polluting of the fossil fuels and looks doomed to be the loser.

Metallurgical coal, the higher-grade material used to make steel, should not be as badly hurt but it will also take a hit because of a drive to make more steel in electric-arc furnaces which can be powered by a variety of energy sources, from gas to nuclear to hydroelectricity.

For two of Australia’s biggest resource companies, BHP Billiton and Rio Tinto, what was said at the Paris gas conference represented the opening of a new front in their battle to keep their coal businesses alive.

Rio Tinto is the most heavily exposed to energy coal and has the most to lose from the gas attack.

BHP Billiton is primarily a producer of steel-making coal and a big producer of oil and gas, including ownership of a one-sixth share in Australia’s biggest oil and gas business, the North West Shelf joint venture.

The chief executive of BHP Billiton, Andrew Mackenzie, has been careful in his comments about the gas attack, saying it was “a little unfair” and while there was an element of truth in what gas producers are saying their views “grossly exaggerate” the situation.

Mackenzie’s view is that being anti-coal is illogical when the real focus should be on dirty coal-burning power stations, a problem that has a technology solution.

But, behind the argument that the problems of coal are fixable, Mackenzie must be furious that Coleman launched a sharply-worded attack on coal given that BHP Billiton and Woodside are business partners and criticising coal is seen as a way of selling more gas.

It was former Woodside executive turned politician, Gary Gray, who rode to the defence of coal describing Coleman’s comments as “not wise”.

“It’s not wise for companies or their leaders to wage war on any one energy source, or talk down the prospects of one source of Australian exports,” Gray told the Australian Financial Review newspaper.

None of the coal critics at the gas conference separated coal by its quality differences. They simply see coal as a competitor in a toughening market and when profits are falling it’s time to try every business-trick in the book.

Climate-change and other moral questions have little to do with the gas attack on coal. It’s all about winning market share in the increasingly competitive business of selling energy.

Unfortunately for coal it doesn’t have a strong case in the climate change debate. It is the worst of the fossil fuels with a pollution footprint at least twice the size of gas, and significantly more than oil.

Gas producers, and that includes all of the world’s major oil companies, appear to have decided that it’s time differentiate their products from coal, no matter who gets hurt in the process.

That means BHP Billiton will be forced to walk a fine line between its coal and gas businesses, and Rio Tinto will be left fuming on the sidelines.