GE Knows Better Than to Let This Opportunity Slide By

General Electric (NYSE: GE  ) is not in the business of missing opportunities. It describes itself as a company that "works on things that matter." Energy for a growing global population certainly matters, and natural gas is an energy darling these days. As natural gas moves closer to worldwide adoption, the fact that it's most easily transported over long distances in liquid form is not lost on GE. GE Oil & Gas is getting more skin in the game.

Release the… Gorgon?
Australia is increasing its liquefied natural gas, or LNG, development by leaps and bounds, particularly from coal seam gas. With seven gargantuan projects expected to reach full capacity in the next five years, Australia is poised to become the world’s biggest LNG exporter.

One of the biggest projects currently under way is called Gorgon. It features the construction of a 15 million ton per year LNG plant on Australia’s Barrow Island, with a loading jetty for transport to international markets that is four kilometers long, and a domestic gas plant with the capacity to pipe 300 terajoules per day of gas to Western Australia. 

Aerial view of the Gorgon plant site on Barrow Island. Source: Chevron

Chevron (NYSE: CVX  ) owns 47% of Gorgon, while Shell (NYSE: RDS-A  ) and ExxonMobil (NYSE: XOM  ) each hold roughly a quarter. The choice of name for the project may have been inadvertently prescient, as Gorgon faces major cost overruns. Chevron announced a $15 billion budget blowout in December, and warned of a potential delay in initial production. 

The whole Australian LNG sector has suffered runaway budgets, largely due to the strong Australian dollar and a shortage of skilled labor. Shell is the leading champion of “floating LNG” as a way to contain costs. Floating LNG is the processing and storage of LNG at sea, and Shell’s Prelude project off the Western Australia coast would be the world’s first such plant if it comes online as planned in 2017. 

Beyond its stake in Gorgon, ExxonMobil has a 50-50 joint venture with BHP Billiton in Australia’s Scarborough LNG project, and recently announced a $3.3 billion budget increase for its nearby LNG project in Papua New Guinea. 

Headwinds
BP’s (NYSE: BP  ) chief economist, Christof Ruhl, has sounded a cautionary note recently. He warned last week that Australia’s LNG boom is buttressed by long-term contracts linked to the price of oil, and that these could be threatened in the coming years as Australia’s natural gas enters the global market.

Ruhl advanced a scenario wherein a confluence of factors – the construction of a gas pipeline from Russia to China, an increase in U.S. exports, and Japanese power sector deregulation – reduces spot LNG prices, leading to pressure to rework contracts. A similar erosion of oil-linked contracts has already taken place in Europe, and Japan is pushing for change in the U.S. as well. BP continues to pursue its own expansion into Australian LNG, but its economist’s reservations are worth consideration.

Tailwinds
Despite these potential concerns, companies are still betting that Australian natural gas will be a bonanza. Certainly the geography is in their favor, with Australia sitting so close to the high-priced natural gas markets of Asia, such as Japan and China. And that’s where GE comes in.

On Tuesday, GE Oil & Gas announced that it had received a $620 million, 22-year contract to provide a broad range of advanced technology services for QGC’s Queensland Curtis LNG plant off Australia’s eastern coast. The plant will be the world’s first to turn coal seam gas into LNG, and will be one of Australia’s largest infrastructure projects. Production is scheduled to begin in 2014, with the bulk of the LNG going to such export markets as China, Japan, and Singapore.

Mercifully, GE intends for the new facility to be one of the most emissions-efficient in the world. Not only is this good for the environment, but it demonstrates management’s savvy in understanding that pollution contributing to climate change could undermine political support for natural gas.

Given that its emissions are lower than those of any other fossil fuel, natural gas is seen as part of the transition to a necessarily less carbon- and methane-intensive energy mix that could help to avert catastrophic climate change. Inefficient design that allows gas to escape reduces natural gas’ attractiveness in this regard, and GE is wisely mitigating this risk.

Foolish bottom line
While there are risks to Australia’s expansion into natural gas, it still looks like a very promising place to be. Companies are developing at full bore, and GE seems particularly positioned to benefit, especially if it succeeds in keeping costs down with its trademark efficiency and innovative design approach.

For GE, the recent financial crisis struck a blow, but management took advantage of the market's dip to make strategic bets in energy. If you're a GE investor, you need to understand how these bets could drive this company to become the world's infrastructure leader. At the same time, you need to be aware of the threats to GE's portfolio. To help, we're offering comprehensive coverage for investors in a premium report on General Electric, in which our industrials analyst breaks down GE's multiple businesses. You'll find reasons to buy or sell GE today. To get started, click here now.


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