Oil is the energy resource that captures public attention, but its poor cousin natural gas could be the one now offering more interesting investment opportunities. Global consumption is growing almost twice as fast as for oil, it is the cleanest-burning of the fossil fuels, and it is comparatively cheap: it currently trades at about half the cost of crude oil on an energy-equivalent basis.
In an energy-hungry world, it’s therefore not surprising that there’s now a mad scramble to procure long-term supplies and bring them to market.
Let’s take a look at some of the current major developments…
Pipelines. Russia, which has the world’s biggest reserves of natural gas, is building a direct link to Germany beneath the Baltic Sea, and planning others to China and Italy. These are enormous undertakings. The 3,000km Italian link, for example, is expected to cost $15bn.
Elsewhere, the ConocoPhillips-BP pipeline to bring North Slope gas from Alaska to Canada’s oil sands industry and the lower 48 US states will be the largest private-sector construction project in North America. And the pipeline China is building from Turkmenistan in Central Asia to Shanghai will stretch for 9,000 kms.
Liquefaction. An alternative means of moving gas is to liquefy it by freezing, ship the liquids across oceans, then turn it back into gas. The technology is not new, but LNG (Liquified Natural Gas) facilities are hugely expensive. For years this limited its transportation to countries not accessible by pipeline, mainly Japan.
But high energy prices have now made LNG viable on a large scale. And there are other advantages. European nations, for example, nervous about their increasing dependence on Russian gas, are looking to alternative sources such as North Africa, using LNG. China signed a $60bn deal with Qatar last month to buy three million tons of LNG a year over 25 years from 2011.
With its volumes growing 7% a year, LNG is the fastest growing of the fossil-fuel industries. Because of the massive investments required, it is dominated by a handful of very large multinationals.
New Reserves. Oil majors are boosting efforts to find and tap hydrocarbon deposits that are primarily gas, with oil as a side-product.
The newly-discovered Sugar Loaf field under the Atlantic off Brazil, claimed to be one of the world’s biggest, is primarily a natural gas resource. The Shtokman development in the Barents Sea off Russia’s Arctic coast, and several projects off the coast of north-west Australia, focus on production of gas, not oil.
There is also increasing interest in exploiting hard-rock resources that have been neglected in the past because it’s difficult to tap their gas. On the western slopes of the US Rockies, Exxon Mobil is starting to employ an explosive fracturing technique three times more effective than conventional technology to unlock the riches of the Piceance Basin.
Coal-bed Methane. The “fire-damp” found in coal deposits – the curse of miners throughout the ages – is almost pure methane and an excellent substitute for natural gas, which is about three-quarters methane. It may be recovered from worked-out collieries or from coal deposits left unexploited because they are so gassy they are too dangerous to mine, and already accounts for a tenth of natural gas production in the US.
BG Group, the global specialist in the discovery, extraction and supply of natural gas, plans to build the world’s first plant to produce LNG from coal-bed methane piped 400km from fields in the interior of Queensland, Australia.
Liquid fuels. Although currently used as gas to fuel central heating, industrial furnaces and power stations, natural gas can be converted into liquid fuels. In Qatar, which has the world’s third largest gas reserves, they’re building plants to do just that.
Worldwide demand for natural gas has been growing at an average rate of nearly 3% a year, compared to oil’s 1.7%. China’s gas consumption is forecast to triple over the next 12 years, India’s to double. Yet between them they have less than 2% of global reserves, so they will be forced to look to imports from the Mideast, Russia and Australia.
Investing in natural gas: major role in power stations
The strongest demand growth area for natural gas is in electricity generation. Dirk Beeusaert, chief executive of Suez, the world’s biggest operator in the field, says the investment cost per kilowatt of power from gas turbines is “half that of a coal plant, and a third of that from a nuclear plant of the same capacity.”
Gas power stations can be built quickly, are flexible in operation, reduce dependence on other resources such as coal, oil and nuclear – and have particular attractions in these times of ecomania. Not only do they produce less greenhouse gases than other fossil fuel, but they can be used efficiently to generate intermittent power, to fill the gaps when turbines driven by wind and water shut down because of calms or droughts.
A couple of decades ago, gas accounted for little of the world’s electricity generation; now it fuels almost one-fifth.
Although the oil majors are giving increasing attention to finding and producing natural gas, most of the world’s resources are closed to them, or are politically high-risk. Russia seeks to use its gas supplies as a strategic weapon in its dealings with Europe and is squeezing out foreign companies. Iran is a different kind of political minefield. Qatar is happy to partner international oil firms, but is also right in the middle of the potentially explosive Middle East.
One country that is benefiting from all this is Australia, which has reserves almost as large as those of the US, production that is likely to continue expanding for the next quarter-century, and a business-friendly environment. Chevron’s Gorgon project alone, which got its go-ahead from regulators a few months ago, expects to produce more than a trillion cubic metres of gas over its 60-year life.
How can you invest in natural gas?
There are several exchange-traded funds that track gas prices listed in the US, the UK and Canada. They are: US Natural Gas Fund (AMEX:UNG), iPath DJ AIG Natural Gas TR ETN (US), ETFS Natural Gas in the UK (dollar (LON:NGAS) and sterling (LON:NGSP) versions), and Horizons BetaPro NYMEX Natural Gas Bull Plus ETF (Canada) (PINK:HZBNF).
Although all major oil companies have substantial and increasing gas interests, only a handful of listed firms are gas specialists:
Gazprom , the Russian company whose shares or depositary receipts are listed in Moscow (RTD:GAZP), New York, London (LON:GAZP) and Frankfurt, is THE giant. It owns one-third of the world’s proven and probable reserves and accounts for a fifth of global production. Trouble is, the enterprise is clearly viewed by the Russian government as its political instrument, so the interests of foreign shareholders have low priority. Also, it has no spare productive capacity and a poor record for developing additional capacity.
BG Group (LON:BG) is the leading international natural gas specialist. Although originally British Gas, the North Sea now only accounts for about a third of its production, the rest coming from wells in Trinidad, Egypt and Nigeria. It is a front-runner in LNG, owning several liquefaction and regasification plants, including one of only four operating in the US.
It has landed a long-term contract with Singapore for three million tons of LNG that it plans to supply from a new Australian venture. It has a 25 per cent share in Tupi, the first field to be brought into production in Brazil’s newly-discovered and massive deep-water Sugar Loaf resource. And it has part of a promising prospect in Kazakhstan. Analysts expect its production to increase twice as fast as its giant rivals BP and Shell over the next few years.
Investing in natural gas: other exploration/production companies of interest
Woodside (ASX:WPL) is Australia’s leading independent with a strong focus on LNG. It operates two projects tapping the enormous gas reserves off the Northwest coast and has stakes in other sea-bed gas ventures off Australia and in the Gulf of Mexico.
North America offers the Canadian natural gas specialist EnCana (TSE:ECA), several producers with a strong focus on gas such as XTO Energy (NYSE:XTO), EOG Resources (NYSE:EOG) and Cimarex (NYSE:XEC), as well as trusts distributing income from gas royalties such as San Juan Basin (NYSE:SJT) and Hugoton (NYSE:HGT).
European Gas (ASX:EPG) is an interesting speculation. This Australian specialist in coal-bed methane has tied up the rights to tap gas from a large area of coalfields in France and Italy. It is drilling test wells at several sites this year.
If you remain positive about prospects for energy resources generally, as I do, because growth in supply will continue to struggle to keep pace with growth in demand, especially from China, then it’s a good idea to have some related holdings in your portfolio.
Natural gas looks even better than oil because of its superior attractions – in particular its relative price.
The Canadian analyst Kurt Wolff, reporting recently that demand for natural gas in the US electricity generating industry surged by 11 per cent last year, said that sign of strength “bolsters our confidence that natural gas price in million BTUs is headed to oil price in barrels divided by five – equivalent to twice today’s level.”
By Martin Spring in ‘On Target’, a private newsletter on global strategy