A Huge New Stepping-Stone for the Energy Industry

Recently, Chevron (NYSE: CVX  ) entered into a contract with Japan's Kyushu Electric Power to supply liquefied natural gas for up to 20 years from its Wheatstone project in Western Australia. This announcement comes after ConocoPhillips (NYSE: COP  ) announced the approval of its final investment decision regarding LNG production in Australia.

Why this is a big deal
The Wheatstone project by Chevron is on the verge of becoming one of the largest resource projects in Australia. Chevron is the main stakeholder in the Wheatstone project with a stake of 73%. The other stakeholders in the project are big energy companies such as Apache (NYSE: APA  ) (13%), Kuwait Foreign Petroleum Exploration (7%), and Shell (NYSE: RDS-A  ) (6.4%). The facility will be used to process and supply liquefied natural gas.

Wheatstone is not the only LNG project in Australia. Australia Pacific LNG project, a joint venture by ConocoPhillips (42.5%), Origin Energy (42.5%), and Sinopec (NYSE: SHI  ) (15%), has also started its facilities in Australia. There are many other LNG projects under way in Australia by companies such as Santos, Woodside, and Inpex.

Rising LNG prices are making the market lucrative and firms such as ExxonMobil (NYSE: XOM  ) and BG Group, which have earned more than 27% of their operating profit from this segment in the first half of this quarter, are expected to increase production. The next obvious question that comes to mind is: Why are so many companies investing in the extraction and production of LNG?

It's a big opportunity
The first and foremost reason is the availability of resources. Government studies have reported the presence of 140 trillion cubic feet of stranded gas in Australian water that has yet to be developed. Australia is the world's fastest growing LNG producer, and with more than $216 billion worth of projects under construction, or in the pipeline, it is poised to emerge as the biggest exporter of LNG by the end of the decade, beating Qatar. The U.S. Geological Survey has reported that about 84 trillion cubic feet of technically recoverable gas lie in the Marcellus shale in the United States. Natural gas is also available in huge quantities in countries such as Qatar, Malaysia, and Indonesia.

Secondly, natural gas is the cleanest of all fuels when it is burned. As more and more countries across the globe are becoming aware of the hazards of pollution and taking steps to curb emissions, LNG will enjoy a huge surge in its demand in the coming years. The LNG market is showing decent growth of 9% in the first half of this year and LTM growth of 13%. LNG prices have been forecast to increase by 71% to about $20 per million British thermal units.

Asia is the biggest consumer of LNG in the whole world, with Japan having the largest share of the imports. Japan and South Korea account for 53% of the world's regasification capacity, i.e., the capacity to convert LNG into gas for industrial and commercial use. The industry is also facing huge demand from the world's fastest growing economies like India and China as their industries and cities expand. The demand for secure energy in India and China could be so high that it may even lead to a fivefold increase in demand in the next decade. The demand for LNG in India and China is expected to be around 50 million tonnes per year and 46 million tonnes per year in 2020, from a mere 9 million tonnes per year in 2010.

Thirdly, the incident at the Fukushima Daiichi nuclear plant in Japan has also opened up new avenues for the LNG industry. The energy shortage faced by Japan in the wake of the Fukushima Daiichi nuclear plant crisis is going to increase the country's demand of LNG. Japan's import is projected to rise by almost 15 million tons in 2011 and 20 million tons in 2012. The earthquake and tsunami in Japan reminded the world of the hazards and risk of nuclear power and has forced countries across the globe to start finding new sources of energy, and given all the constraints, LNG looks to be a good alternative. This is very much evident from the fact that LNG costs have increased by about 33% after the Fukushima Daiichi incident.

The Foolish takeaway
As the world continues to grow, the demand for energy will also rise. Growing demand for cleaner forms of energy, given supply constraints, should make the market very lucrative. This is one segment that has the potential for some serious growth.

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Fool contributor Abantika Chatterjee does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (20)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 27, 2011, at 11:18 PM, foolbar2 wrote:

    Very interesting article. Any idea where international LNG futures traded (I know that NYMEX and ICE have futures/swaps for Henry Hub NG)? Also, do you have a reference for the estimate of $20/mmbtu?

    Thanks!

  • Report this Comment On September 28, 2011, at 5:58 AM, cupocoffee wrote:

    I would be interested to know who is dominant in shipping, tank manufacturing for shipping, building regasification facilities, and pipeline connectors for LNG. Any information from the FOOLS?

  • Report this Comment On September 28, 2011, at 11:11 AM, Wade32ru wrote:

    Liquification and regasification terminals - you'll have to go with the EPC's = CBI, KBR, FLR

    Shipping - hard to play. Most are made in China, South Korea, and Japan.

    Nat Gas pipelines is a compelling way to play this & there mostly the mid-stream players: look at GLNG, LNG, and TGP.

  • Report this Comment On September 29, 2011, at 6:24 AM, cupocoffee wrote:

    Thank you Wade32ru.

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