Why LNG is firing up again

Summary: An inside look at the factors currently driving Australian energy majors including Woodside, Oil Search and Santos.
Key take-out: While investors are wary of what looks to be the start of an oil and gas revival, share prices of local stocks are slowly moving higher.

Growth is returning to Australia's liquefied natural gas (LNG) industry despite forecasts that high costs and construction delays in the last building boom would prevent a second phase of LNG-project development.

Driving the unexpected revival is the rising price of oil which is used as a benchmark for pricing LNG, alongside faster-than-expected demand growth for gas. This trend is clear, especially in Asia where a shift away from coal-fired power generation is boosting gas consumption.

At its latest price in Europe of $US73.41 a barrel, oil is at its highest since late 2014, the year when oil plunged from more than $US100/bbl to less than $US30/bbl thanks to over-supply from traditional oil-producing countries and a surge in US oil exports.

The 2014 price collapse sent shockwaves through the global oil industry, forcing a painful process of cost-cutting. This, combined with the higher oil price, means the oil and gas industry is starting to generate substantial profits, corporate activity and early-stage project planning.

Investors, so far, are wary of what looks to be the start of an oil and gas revival. Share prices of local stocks are moving higher, but not rapidly.

Sector leader Woodside is up about $2 (7 per cent) over the past month, but at its latest price the stock is up just over 40 cents over the past 12-months.

Oil Search is up about 8 per cent over the past month, meaning it has added just 50 cents in 12 months. Santos has done better, adding around 95 cents (19 per cent) over the past month, but that's largely because it has received a takeover bid.

Source: Nabtrade

It's the move on Santos by US-based Harbour Energy, which is one of the indicators of a fresh wave of activity in LNG. It also means potentially more work for ASX-listed engineering and construction companies, and other service providers.

Harbour's plan is to use Santos as an entry point into Australia's under-supplied east coast gas market, as well as expand its footprint in LNG, both locally and in overseas opportunities.

The chief executive of Harbour, Linda Cook, spent 29 years with the world's leading LNG producer, Royal Dutch Shell, and is believed to be keen to replicate in Santos the LNG division she helped run at Shell.

Revolving the ownership issue at Santos will not be easy. Others have tried and failed to refresh the Adelaide-based company.

While the Santos situation is being resolved other LNG players are making their moves, with one of the first being US-based Chevron, which last week announced plans to invest an estimated $US4 billion in a second-stage of its giant Gorgon project off the WA coast.

A ‘modest' investment compared with the $US54 billion already spent on Gorgon, the next phase of work will mainly consist of drilling extra production wells and laying subsea gas-gathering equipment.

Starting now on expanding their capacity should mean that Chevron will be the LNG producer to get the lowest-cost bids from contractors. This means they will get in ahead of Woodside, which is stepping up its LNG development plans with the Scarborough gasfield being designed as the supplier to an upgraded Pluto processing plant.

While Scarborough is likely to be Woodside's next major LNG development there are two other projects on the company's books, Browse and Sunrise, which are unlikely to go ahead in the next five years, but they represent a valuable asset in the ground waiting for the right conditions.

Woodside is already benefiting from the higher oil price as well as the beginnings of production from its part-owned Wheatstone LNG project in WA. The company reported earlier this week that production in the March quarter was steady, but revenue rose by 18 per cent to $US1.17 billion.

Oil Search, which suffered a production setback in the March quarter after an earthquake near its part-owned LNG project in Papua New Guinea, is moving closer to a development decision on the next development phase.

A major step towards a fresh round of investment in PNG LNG was taken last week when Oil Search reported a big increase in gas reserves at fields which would feed an expanded processing operation.

Other signs of increasing LNG activity include:

• The establishment of Australia's first LNG trading business, GLX, a small company which has the backing of high-profile Melbourne investor, Alex Waislitz, and

• Interest shown by iron ore billionaire Andrew Forrest in a business shipping LNG from the west coast, where there is a gas surplus, to gas-hungry east coast markets.

Because LNG is an intensely capital-intensive business there are few obvious entry points for investors, except through the oil and gas majors which dominate the business

But, on the sidelines, there are service providers which will benefit as capital development returns to LNG and Australia moves closer to becoming the world's biggest LNG exporter.