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Investment Thesis for InterOil part 2: LNG markets

February 13th, 2009 · 4 Comments

In the first episode, we took a look at the world oil market. The situation for natural gas is, if anything, even worse, although nothing of that is visible because of the fall in demand caused by the recession.

For instance, most gas resources really are concentrated in countries with rather troubled political situations (to say the least), apart perhaps from Qatar.

The following articles provide some overview for getting a clear picture of just how many political problems most of the main gas producers/exporters face, very insightful, and painting a rather bleak picture.

Are there any new gas sources that can potentially alleviate gas supplies, and situated in less troubled regions? Yes, Australian and Canadian coal-seam gas, and American and Canadian shale gas.

Since there is no world market for natural gas, it has to be said that gas from Canada or the US doesn’t really matter that much, unless it would be very cheap indeed. But exactly the opposite is the case, the US and Canadian coal-seam and shale gas is expensive.

Shale gas resource base is abundant, but (Simmons & co. p28):

  • It is very energy intensive to get out of ground
  • Its decline rates vary by type of shale
  • Individual well flows are small (so many wells have to be drilled)
  • For instance, a map of Canada indicating average production prices (one has to go to p.15). Note that nothing is below $6 per Mcf. and compare that with today’s (mid Feb 09) spot prices in the US ($4.5 per Mcf) and you’ll realize much of that new shale and coal seam gas is expensive.

Since there is not really a world market for natural gas, we have to look at the region. Asia is the most lucrative LNG market (gas in liquid form, LNG -liquid natural gas, because there are hardly any pipelines to speak off). This is witnessed by large and persistent price differentials with the rest of the world:

  • LNG sellers will first fill up markets in Asia and Europe, which pay top prices. What’s left over will likely head to underused terminals in North America [Daily Astorian]
  • Taiwan purchased two LNG cargoes for immediate delivery from Nigeria in December, paying $920 a ton, equivalent to about $17.5 per million British thermal units, compared with about three cargoes a year earlier at an average price of about $12, the data from the energy bureau showed. Benchmark gas futures in New York were at $4.6 per million Btu. [Chinapost]

That amounts roughly to $17.5 per Mcf, which is a multiple to US spot prices ($4.5 per Mcf).

The most important suppliers here are Indonesia (the region’s largest exporter), Russia (the world biggest reserves) and Australia (up and coming). Not all is well in all three of these.

Indonesia is cutting back exports for domestic use:

  • Further Decline Expected For Indonesian LNG Output
  • Indonesia will divert fuel to fertilizer makers. The Bontang plant in the Kalimantan region will produce about 320 cargoes this year, lagging behind its contracted volume of 350, Daniel Purba, head of LNG market development at PT Pertamina, said in May. The plant can produce about 400 a year, he said. A cargo is typically 50,000 to 60,000 tons.
  • Pertamina, Indonesia’s state oil company, will cut supplies to a group in Japan by 75 percent after its contract expires in 2010, Vice President Iin Arifin Takhyan said in October. [Bloomberg]

Russia’s gas fields are in a terrible state:

Russia’s three top gas fields produce 65% –70% of its gas.

  • All have peaked.
  • Urengoyis the “Ghawar” of global gas:
  • –It peaked in the mid-1990s at 305 bcm/year
  • –By 2000, Urengoy’sproduction was 145 bcm/year
  • –By 2015, production is estimated to fall to 70 bcm/year
  • Yamburg’s decline is close behind.
  • Zapolyarnoyecame on stream one year ago and is just starting to decline. [Simmons & co. p31)

In fact, the whole gas crisis between Russia and the Ukraine happened because Russia could not supply all parties anymore [ Simmons & co. p30]

Australia has it’s own problems:

Just to compare, two wells from InterOil (Elk1&4) flow enough gas to supply 40% of the daily intake of an LNG facility. Australian coal seam projects need thousands of wells to achieve the same, and these are in a much higher cost environment.

PNG really does look like it is set to become a significant natural gas (LNG) player in Asia, there is simply too little competition, or if there is, it’s too far away or too expensive (or usually both).

Tags: IOC · Natural Gas

4 responses so far ↓

  • 1 Jim Tate // Feb 13, 2009 at 10:41 pm

    IOC hits $60 this summer and over $100 next year….Long live Phil.

  • 2 ron cobb // Feb 14, 2009 at 12:35 am

    Well done, my friend!

  • 3 Darcy Patten // Feb 14, 2009 at 1:06 am

    Thanx STP!

  • 4 InterOil: A lot more to come.. — shareholdersunite.com // Apr 1, 2009 at 6:23 pm

    […] We’ve assembled material on these markets and IOC’s position in it here, and here. […]