By now, it should have been clear for quite a while that the ever rising price of crude oil indicates that there are real fears of a pending shortage, demand is structurally growing faster than supply. This has let Goldman Sachs to say that oilprices could go to $200 per barrel even as early as this year. Since oil and LNG are substitutes, and price and technology are globalizing LNG makerts, this sector is set to boom. 

Chris Theal, head of research at the energy advisory firm, believes:

LNG’s importance as a supply source to North America will grow, forcing the continent into a more global natural gas game, in which large importers of LNG, such as Japan and China, are already locking up long-term contracts with suppliers and paying $16 US per million British thermal units. Theal also predicts, as many do, that global natural gas pricing will converge with oil, and ultimately the two fuels will trade in a close tandem. “There’s an awful lot of LNG that’s going to get locked up under long-term contract and we believe it’ll leave a scarcity of gas beyond 2010 and 2011,” said Theal. “And if you want to meet your power generation requirements with natural gas, you’re going to have to pay an oil-link price to land that gas ashore.”

We wonder, what kind of prices would $120 per barrel oil imply for LNG? A very useful primer on LNG provides some clues

The price of oil impacts the worldwide demand for natural gas. As the price of oil increases, countries that use oil for industrial purposes or electrical generation would like to purchase a lower cost alternative such as natural gas. If oil is $100 a barrel, even at $15.00 per Mcf, natural gas is competitive with oil.

If at $100 a barrel, $15 per Mcf of natural gas is competitive with oil, then we are already at $18 per Mcf now, since oil just passed the $120 per barrel mark. Of course, the demand in Asia is so large, that they are paying these sums and more already, as we reported before.

What’s behind this boom in LNG, apart from the increasing link with oil prices? Well, demand is increasing structurally, and this is no surprise, as gas burns way cleaner than any other fossil fuel. This from professor Banks, a well known energy expert:

Global gas demand is expected to rise by 2.5-2.7%/y (although in the U.S. this figure will be 2%/y), even though the price has started moving up rapidly. The big consuming area will likely be Asia, where it has been suggested that demand will increase by an average of 3.5%/y between 2001 and 2025. The share of gas in world energy demand could move in that period from 21% to at least 24%.

Indonesia is by far the biggest exporter in the regio, and it has problems, which have serious impact regionally, as it’s the world third biggest exporter. This from Bloomberg on March 31 this year:

Indonesia has failed to meet LNG supply commitments to Asian customers since at least 2002 as reserves in several fields feeding its existing plants in Bontang and Arun in Aceh province declined faster than expected while domestic demand rose

The demand for natural gas in Asia is increasing structurally whilst supplies from Indonesia, it’s biggest exporter are increasingly problematic. And Indonesia is hardly the only producer struggling to meet export demand

Political strife, so-called strategic gas reserve and production caps and increasing delays of new projects, in combination with high levels of economic growth in the main producing countries, Qatar, UAE, Egypt, Algeria, Nigeria and potentially Iran, are not mentioned at all in strategic assessments done by the EIA, International Energy Agency (IEA) and others. The picture becomes even bleaker if alternative sources, coming from North Africa (Algeria, Libya or Egypt) and the Persian Gulf are not immediately available in the necessary volumes. British oil and gas major BP [NYSE:BP; LSE:BP] said recently at a conference in the Gulf region that Gulf countries are finding it more difficult to access hard-needed gas reserves.

Even the US is in trouble, professor Banks again:

The domestic U.S. gas output has peaked, and more alarmingly the gas rig count in that country also appears to have peaked. This suggests that more than a few important firms now regard North America a hopeless case for large scale investment in the gas sector, even with rising gas prices.

And Europe too, as the battle for natural gas intensifies (from resource investor)

In the coming years, the battle for LNG will heat up, the outcome is still unclear. Prices will go up as demand is exponentially higher than supply, due to political and legal changes in producing regions. Investors should realize that some of the multimillion tank farms in the Gulf of Mexico or North Sea Europe could be hit by drought for a long time.

And, somehow, trying to import the stuff, they’re getting trumphed by Asians (from McKenzie Brown):

Also, prices for LNG are now much higher in Europe and East Asia than in the US, so that supply is going elsewhere: US imports have dropped from 4 billion cubic feet (BCF) per day last July to less than half a BCF today. And while the surge in south-central gas supply continues – mostly in Texas – production is in decline everywhere else in North America except Alaska, which isn’t connected to any serious markets.

Supplies are actually, surprise, surprise, reacting to price signals and diverting to Asia, where prices are higher. China also wants lots of the stuff, for obvious reasons:

The country relies on coal for most of its electricity production, with devastating consequences for the environment. China is already recognizing its need to secure supplies of clean energy over the next several decades and has started buying liquid natural gas (LNG) production several years forward. Investors should get in early on this trend and invest in LNG producers. Currently China derives 70% of its energy production from coal — 2.4 billion tons in 2006 to be exact — more than the U.S., U.K. and Japan combined. Sixteen of the 20 most polluted cities of the world are in China. Coal is responsible for roughly 90% of China’s sulfur dioxide emissions and 50% of its particulate emissions.

All this, of course, opens up huge opportunities for new players, like (you guessed) Papua New Guinea, and InterOil:

With nearly 50 TCF of land-locked gas ready for production, gas resources cast off as “uneconomical,” are set to become wildly profitable and the making of billions of dollars will begin. Papua New Guinea is loaded with gas. But if you can’t move it, you can’t produce it, and if you can’t produce it, you can’t sell it, so it’s absolutely worthless. But not for much longer…. China National Oil Company (CNOC), Exxon, Merrill Lynch and Interoil have now declared they will be building the $30B key to unlock PNG’s reserves. They’re building Liquefied Natural Gas (LNG) terminals. The 50 TCF of “worthless”gas in PNG isn’t going to be worthless anymore.

Were is all this going to lead? Well:

There are currently roughly 30 LNG plants around the world producing about 180 million tonnes per year (mtpa). Demand for LNG will grow to around 380 mtpa by 2015, and demand is expected to outstrip supply, based on current projects under construction and those probable for start, according to industry analyst Wood Mackenzie.

Sometimes things are not so hard to predict, almost everywhere, countries and utilities are scrambling to secure long-term gas supplies. All this leaves us wondering, what were those people who shorted IOC smoking?

Happy investing!