Daily Archives: April 20, 2011
April 4, 2011 12:13 PM EST
(This story was originally published on March 25, 2011. It has now been re-published to make it in full available to non-paying members at FNArena and to readers elsewhere).
– Japan has an immediate need for LNG – Japan, and the world, may now turn away from nuclear and toward LNG – Australian producers will not benefit in the short term, but should in the long term – US shale gas looms as a possible contender
By Greg Peel
A fortnight ago, investors were sitting back scratching their heads over whether the great Australian liquid natural gas (LNG) bonanza was, or at least threatened to be, a fizzer, long before proposed projects even come close to production. Yes, there is China and India to think about, and long term customers Japan and Korea. But while future demand may be unquestionable, what about the extent of future supply?
It was three years ago when Origin Energy rejected an initial bid from British gas giant BG. The target was Origin’s reserves of coal seam methane (CSM) in Queensland which, like the natural gas being sucked from beneath the ocean off Western Australia, can be converted into LNG for export purposes. This bid came out of the blue and caught investors, and stock analysts, napping. Coal seam what?
A step-jump re-rating of gas stocks followed, particularly of anyone with a CSM interest such as Santos ((STO)) as well as Origin ((ORG)), along with anyone with LNG interest in general such as Woodside ((WPL)) and Oil Search ((OSH)) the latter which, along with Santos, has significant interest in PNG LNG. But then it all came to a screaming halt.
There was the small matter of a GFC, but once China was back on board with a vengeance the GFC didn’t matter anymore. What did matter is the substantial time and cost involved in building the “trains” required to convert either natural gas or CSM into LNG, the long term sale agreements that simply need to be secured to provide both commercial viability and funding, and the sufficient confirmation of available gas reserves needed to satisfy the confidence of potential buyers Here, progress has been slow.
The reasons for slow progress have been many, including project delays, increasing capex costs and even the weather. The biggest problem has been a reluctance from potential buyers. These buyers are reluctant because there is simply so much natural gas in the world, and so many projects under construction or proposed, that gas prices have stagnated and the buyers can pick and choose. There is a race on, both within Australia and across the globe, and not everyone will be a winner. Some proposed projects may need to be scrapped.
At least, that was the state of play prior to the earthquake and tsunami hitting Japan, and the subsequent nuclear scare. Analysts across the globe are now in agreement on two counts: (1) Japan’s lost nuclear capacity will mean an immediate need for alternative sources of electricity generation, and the obvious choice is LNG; and (2) the nuclear scare will cause Japan to rethink its nuclear energy plans and capacity, and may well have a ripple effect across the globe on the same basis. Here LNG also stands to be the big longer term winner.
Nuclear energy is considered “green”although there are plenty of arguments over the amount of energy expended in building a nuclear reactor and mining and transporting the required uranium. LNG is not considered “green” per se, being a fossil fuel, but it is a lot “greener” and indeed cheaper than oil products. It is not cheaper than coal, but coal is the dirtiest of all energy sources.
Japan is the world’s greatest importer of LNG. Japan has no LNG of its own, nor anything much else of its own on the natural resources front, and there is no pipeline delivering natural gas to the island nation. Japan also has a significant surplus of regasification capacity, built with the future in mind as well as for a back-up in times such as these, so it stands ready to quickly restore electricity demand through LNG sources.
[There are two steps in the process of getting natural gas from producer to consumer. The natural gas has to be liquefied for transport, known as “liquefaction”, and then un-liquefied at the other end for consumption, known as “regasification”. It takes years and a lot of money to build liquefaction plants. It takes a lot less of both to build regasification plants.]
In the short term case (1) above, Australia is not in a position to benefit. There is some spare capacity available in the massive North West Shelf project but realistically whatever LNG being produced now is being produced for existing long term contracts. Qatar, on the other hand, has so much excess supply it effectively rations sales in order not to crunch the LNG price, and this year the last of Qatar’s “mega-trains” will be complete.
Qatar sells most of its gas in the Atlantic region at spot but often secures term deals in the Pacific region as well if the price is right. It is Qatar which will thus stand to benefit from Japan’s immediate extra LNG demand as it is the swing player with the capacity to quickly reroute cargoes. Analysts are not factoring in any benefit to Australian gas producers from immediate Japanese demand.
It is the long term case (2) above which is of most importance to Australia. Prior to the quake, Japan satisfied 30% of its electricity needs through nuclear and 30% through LNG, with the balance being coal and other sources. It has now lost 20% of its nuclear capacity – for good it would seem – and analysts agree there is not a big chance the government would look to restoring that balance and probably will completely rethink its future nuclear plans in favour of LNG.
Others may or may not do the same, and there is not an expectation China, which has far and away the greatest nuclear power ambitions, will much change its thinking. China also has huge LNG demand potential and LNG power plans and maybe even it will lean a bit further in the LNG direction now. Either way, Japan alone and a likely dampening of nuclear ambitions globally means expected longer term LNG demand has just been given a substantial boost.
That boost should prove to be the shot in the arm needed for Australia’s plethora of proposed gas projects looking to reach financial decisions on either first trains or additional trains. Gas reserve security has been one stumbling block, but the biggest stumbling block has been contracts with buyers. (Note that we can here also throw in the search for required equity partners, which may mean gas company joint ventures or equity stakes taken by customers, to cover the significant capex funding requirements).
Deutsche Bank has thus rolled out the obvious list of potential Australian winners. They include Woodside with its Pluto expansion and Browse and Sunrise prospects, Santos with its Gladstone LNG expansion and PNG LNG expansion, Oil Search for PNG LNG and Origin with its Asia Pacific LNG project.
We must not forget there are also plenty of other projects underway or proposed in Australia which are foreign-owned. The obvious stand-out is Gorgon, but there is also the substantial Ichthys project in which Japan is a major stakeholder, making it an obvious LNG source. The bottom line is that while service contracts, jobs and taxes are gleaned from all projects, Australian gas companies are still competing with the world in their own country.
Then there is the small matter of US shale gas.
There is a lot about America that boggles the mind, but the fact that there is an oversupply of natural gas in a country that is totally beholden to oil exports from its enemies is right up there. It wasn’t always the case, as years ago there were companies looking to build regasification plants in the US for the importation of LNG to meet rising gas demand. But now the boot is completely on the other foot, notes Barclays Capital, as those companies are now talking about building liquefaction plants so as to begin exporting LNG.
When coal seam methane suddenly hit the front page a few years ago, it wasn’t new, and indeed CSM LNG had been already commercially produced in the US. But at that point a light bulb lit up somewhere, and before we new the fastest growing energy industry in the US became that of shale gas – a not dissimilar concept. It is the “undisputable success” of shale gas development, notes Barclays, that could make the US a viable LNG exporter for the first time.
That’s not news Australia wants to hear. Since 2009, notes Barclays, a record number of liquefaction facilities have come on line in a short period. Initially, LNG flooded a market which saw demand suddenly drop as a result of the GFC, and for two consecutive years the world has been able to produce more LNG than demand growth could account for. Demand has been reflected in the construction of regasification plants, which have not kept pace.
But as noted, regasification plants can be built in a much shorter time frame than liquefaction plants, and expected demand growth from the likes of China and India, and now Japan, means the tide will shortly turn. Global gas demand increased by 60% from 1990 to 2010, and that rate is expected to accelerate as new residential and commercial demand opens up. Barclays now estimates that the Japan effect alone will bring LNG demand and supply roughly into balance this year.
Analysts had already assumed a deficit situation would be reached some time before 2014 given the timing gap between the projects which came on line by 2009 and the next wave of new projects under construction which would take a few years to go online. It is in 2014 that supply is expected to commence from the Curtis and Fisherman’s Landing CSM LNG projects in Queensland, the Gorgon project in Western Australia, as well as Indonesia’s offshore Donggi Senoro project.
Between 2014 and 2016 or later, we will see another wave of Australian supply (assuming they all go ahead) from the likes of APLNG, PNG LNG, Pluto, GLNG, and perhaps Browse and Sunrise, among others. “The uncertainty on their commissioning times,” says Barclays, “is too great to bear a reasonable significance in our analysis. Most of the ones targeting FID [financial investment decision status] in the next two years are still searching for buyers”.
The Japanese disaster has distorted the picture, such that Barclays sees liquefaction capacity falling far short of regasification capacity growth in the 2012-13 gap. The majority of regasification growth will come from Asia, but Europe should come in second. (Note that all of Europe occasionally suffers from natural gas shortages when Russia turns off the pipeline to meet demand at home). The picture then changes quickly again in 2014-15.
This is the window of opportunity for all gas hopefuls, from WA and Queensland on to the US shale gas fields to capture the buyers. Even if there were enough demand, with Japan a new element, to make all Australian projects viable, the entry of US shale LNG would quickly rebalance the global market, Barcalys suggests.
But it may not be until 2016 before the first US shale LNG hits the market. Australia, notes Barclays, “has the lead”, and US shale might find a market already in balance.
Beyond that, Barclays believes China’s potential LNG demand growth is “seemingly boundless”. India’s gas markets are growing rapidly as well. Japan (pre-quake) and Korea have already been making the shift away from petroleum products and towards natural gas while in Europe and North America, natural gas is far cheaper than petroleum products and as such competing with coal for power generation.
On the counter side, China and India may well be able to source their own shale gas. India has large offshore gas reserves yet undeveloped. China also has pipelines being built from gas suppliers in Iran, which owns the other half of Qatar’s vast Persian Gulf supplies, and the former Soviet Union. There are also alternative energy developments to consider.
Either way, and as tragic as the situation has been, the Japanese earthquake may just be the catalyst a seemingly foundering Australian LNG market might need. Stock analysts have long priced in the potential for earnings growth once various projects reach production, while acknowledging the risks of finding enough gas, finding enough money, finding joint venture partners, and the simple, obvious risks of massive infrastructure investment with a long lead-time. Investors had begun to lose hope, and started discounting further-out projects such as Woodside’s Browse and Sunrise down to zero. Additional train expectations at the likes of Pluto, GLNG and PNG LNG have also been taken more recently with a pinch of salt.
The biggest impediment has been a lack of willing buyers. Perhaps the time has come.
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Posted April 20th, 2011
Someone should really tell the Department of Energy (DOE) about the federal government’s spending crisis.
Add to that a $1.6 billion loan guarantee for another plant in California’s Mojave Desert, a $1.2 billion loan guarantee for one in San Luis Obispo County, Calif., and $967 million for a location in Arizona, all since February, according to a Forbes.com report. That’s nearly $6 billion in taxpayer dollars to back up private industry’s green energy ventures.
But that’s just the tip of the iceberg.
According to The Heritage Foundation’s Nicolas Loris, the DOE is one of the fastest growing federal agencies with a budget that grew from $15 billion in FY 2000 to $26.4 billion in FY 2010—a staggering 76 percent increase in only one decade.
Loris has identified $6 billion in possible cuts, among them, $3.2 billion for the Office of Energy Efficiency and Renewable Energy, which is tasked with funding the research and development of “clean energy technologies” — commercializing technologies, not promoting research. Loris writes:
It is neither the DOE’s responsibility nor the role of government to make projects cost-competitive. The company that can make biofuels or any of these other alternative technologies cost-effective and environmentally efficient will reap the rewards for doing so with high profits. Increased competition will directly benefit the consumer, and the DOE should not artificially prop up these technologies and energy sources.
It’s not news that the White House is dedicated to promoting alternative sources of energy as part of its green agenda. But government has a role, and its job is not to undertake tasks better left to the private sector. And that’s especially true in a time when government spending must be contracted, not expanded.
Author: Mike Brownfield
Apr 15, 2011 2:59 AM CT By Rich Miller and Simon Kennedy
The global economy is cooling, in a shift that will slow, not stop, the worldwide expansion.
Growth is decelerating in the two largest economies as finance ministers and central bankers gather in Washington for the semi-annual meeting of the International Monetary Fund and World Bank starting today. Higher gasoline prices have sapped consumer spending in the U.S., while tighter monetary policy has curbed demand in China. Japan, the world’s third largest economy, is struggling to right itself in the wake of a record earthquake, while Europe is battling a debt crisis that claimed its third victim — Portugal — last week.
“The headwinds we’ve run into are pretty strong,” said David Hensley, director of global economic coordination at JPMorgan Chase & Co. in New York. “The fundamental forces driving the recovery have not been stopped. We’re bending but not breaking.” JPMorgan Chase sees growth of 4.2 percent this year, down from its 4.7 percent forecast in January.
The enduring expansion means that global stock markets are still a buy, even as the world economy “loses some of its acceleration,” said Jim O’Neill, chairman of Goldman Sachs Asset Management in London. “The bull market in equities continues,” he said. He sees the Standard & Poor’s 500 Index rising to between 1,400 and 1,450 by the end of the year from yesterday’s close of 1,314.52.
‘Really Under Way’
The IMF argues that the rebound has become “more self- sustaining” as increasing private-sector demand replaces waning public support in promoting growth, according to its World Economic Outlook issued this week.
“This is not a time for complacency, but the good news is that the recovery is really under way,” IMF Managing Director Dominique Strauss-Kahn said yesterday in an interview on Bloomberg Television’s “InBusiness” with Margaret Brennan. The Washington-based lender forecasts world growth of 4.4 percent this year and 4.5 percent in 2012, after 5 percent in 2010.
Expansion expectations nevertheless fell for a second consecutive month in April, according to a Bank of America Merrill Lynch survey of fund managers published this week. Forty-two percent of investors polled also said they see a period of below-trend growth and above-trend inflation.
In India, Asia’s third-largest economy, the benchmark wholesale-price index rose 8.98 percent in March from a year earlier, the commerce ministry said today. The Reserve Bank of India last month predicted inflation would be 8 percent by the end of March.
‘Rock and Roll’
The global economy is experiencing a “rock and roll recovery,” said Holger Schmieding, chief economist at Joh Berenberg Gossler & Co. in London. “While occasional shocks are rocking the markets, the recovery keeps on rolling.”
The oil shock did hit the U.S. economy hard in the opening months of 2011, as prices for regular gasoline at the pump jumped to the highest since 2008. St. Louis-based Macroeconomic Advisers reckons that gross domestic product declined 0.2 percent in February after dropping 0.4 percent in January. For the quarter as whole, the economic forecasting firm foresees GDP rising at an annual rate of 1.5 percent after increasing 3.1 percent in the fourth quarter.
The $38 billion deal to cut federal spending that lawmakers agreed on last week may trim economic growth, though at most by only a few tenths of a percentage point, said Nariman Behravesh, chief economist in Lexington, Massachusetts, for research group IHS. “Some of the numbers that have been bandied about are smoke and mirrors,” he said.
In Japan, GDP may shrink 3 percent in the April-June period, the most since the aftermath of the 2008 Lehman Brothers Holdings Inc. collapse, as power and supply-chain disruptions reduce production, according to the median of 18 estimates in a Bloomberg News survey in the past week. Growth should rebound next quarter as Prime Minister Naoto Kan’s proposed 4 trillion yen ($48 billion) initial reconstruction package kick-starts a recovery, the survey shows.
Tokyo-based Shiseido Co., the country’s largest cosmetics maker, said this week the quake may have reduced its sales by 3 billion yen. A Shiseido factory that makes products including shampoo was damaged by the temblor.
China’s economy also may be decelerating, although, unlike in the U.S. and Japan, that seems more by design than happenstance. GDP rose 9.7 percent in the first quarter from a year earlier, the statistics bureau said today, down from a 2010 peak of 11.9 percent.
‘Out of Control’
A slowdown in the world’s second-biggest economy would help address inflation that billionaire investor George Soros warned this week is “somewhat out of control” in the aftermath of a record credit boom and higher commodity prices. The People’s Bank of China has raised interest rates four times and boosted banks’ reserve-requirement ratios six times since early October to contain price pressures.
Doubts about the euro area’s economic outlook have also increased after the European Central Bank raised its benchmark interest rate last week for the first time since July 2008, threatening to compound the pain of the continent’s sovereign- debt turmoil. Portugal last week followed Greece and Ireland in seeking an international bailout and is being told to implement a tougher fiscal squeeze to win it. Bonds of Europe’s most- indebted nations fell yesterday on concerns that they will have to restructure their debts.
The moderation in global growth has taken the edge off some commodity prices. The most-active copper contract closed at $4.3035 a pound yesterday, down from a record $4.6575 on Feb. 15, in trading on the Comex in New York. Lumber futures fell 22 percent to $266 per 1,000 board feet yesterday on the Chicago Mercantile Exchange from $340 on Jan. 4, the highest intraday price since May 5, 2006.
The deceleration hasn’t led so far to a repeat of the “double-dip” talk that was prevalent last year when the outbreak of Europe’s debt crisis fanned fears among investors that the world economy was relapsing into recession.
There are good reasons for that, Hensley said. The U.S. labor market is strengthening, with private-sector payrolls rising by 470,000 in the past two months, the biggest such gain in five years. Unemployment fell to 8.8 percent in March from 9.8 percent in November, the sharpest drop since 1983.
Balance sheets are also in better shape. Net worth for households and nonprofit groups rose by $2.1 trillion in the fourth quarter of 2010 as share prices rose and families rebuilt finances tattered by the recession, according to Federal Reserve figures.
The improvement is encouraging some consumers to take on debt again. JPMorgan Chase said this week that its credit-card- services sales volume — the amount of money spent using its branded cards — climbed 11.7 percent in the first quarter from a year earlier. That’s up from 9 percent in the fourth quarter and 4.2 percent in the first quarter of last year.
The increase “does reflect some underlying positive sales trends for consumers in general,” Douglas Braunstein, chief financial officer of the New York-based bank, said in an April 13 conference call with reporters and analysts. The second biggest U.S. bank by assets reported that its profits rose 67 percent in the first quarter to a second consecutive record as provisions for bad mortgages and credit-card loans tumbled.
Corporations also have improved their finances. Profits from current production climbed 29 percent last year, the biggest annual gain since 1948, Commerce Department figures show. And in a sign that industrial production may continue to improve, railroad-shipping volume, excluding coal and grain, increased 7.9 percent in the first quarter, according to data compiled by the Association of American Railroads.
U.S. stock prices have weakened as growth has slowed, with the S&P 500 off 2.1 percent from its 2011 high set on February 18. That pales against the 16 percent mid-year fall the index suffered in 2010 as concern about a double dip took hold.
“We’ve had a little bit of a wobble the past couple of days but we’ve come a long way, in effectively a straight line, since a few months ago, so it’s not surprising,” O’Neill said.
He took encouragement from the recent rise in the Chinese stock market and said it suggests a growing confidence among investors about the country’s ability to engineer a “happy slowdown” of its economy. The Shanghai Composite Index, which tracks the larger of China’s stock exchanges, has climbed 14 percent from its 2011 low set on Jan. 25 and traded at 3,050.53 at 3:32 p.m. in Shanghai.
In Europe, much depends on Germany, the region’s largest economy, which expanded in 2010 at the fastest pace in two decades. The country’s government yesterday raised its forecast for growth this year to 2.6 percent from 2.3 percent. The economy climbed 3.6 percent in 2010.
“There are a larger number of risks out there than is typical at this stage of an expansion,” said Allen Sinai, president of Decision Economics in New York, talking about the global economy. “I don’t think they are show-stoppers.”