Opportunities in smallcaps header image 2

All you ever wanted to know about natural gas

September 1st, 2008 · 4 Comments

Numerous fine articles, a host of sources.

Our comments are in [brackets] and any emphasis is ours.

The economics of LNG

  • [We’ve published it earlier, but it remains a primer on what is required to bring LNG to market, and at what cost.]
  • Japan is the largest importer of LNG followed by Korea, the United States and Europe. LNG demand is growing in most of the current large importers of LNG but it is also growing quickly in India, China and South America.
  • 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.

LNG has bright future May 3, 2008

  • [Very interesting perspective on the still somewhat fragmented global gas market. We used some of it in an article of our own, with many more sources, here]
  • 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.”

LNG prices set to rise May 5, 2008

  • [US natural gas, trading at less than halve Asian prices, are set to increase long-term]
  • U.S. natural gas prices are poised to head higher over the long term when commercial demand increases, according to a report by the Federal Reserve Bank of Dallas. “Higher oil prices, several cold spells, seasonal gains in demand, reduced inventories and expectations of increasing natural gas use to generate electricity are continuing to push prices upward,” the bank says in its first quarter energy report. Nonetheless, domestic prices are still depressed compared to the fast-rising prices commanded on the international market for liquefied natural gas, selling for between $18 and $19 per million cubic feet, about twice the domestic price for natural gas futures.

LNG being diverted from US to Asia April 24 2008

  • [Tankers changing course in mid-ocean as gas prices in Asia are much higher]
  • Liquefied natural gas, which had been coming to U.S. shores in record volume, is being diverted to Asia and Western Europe. The federal energy agency projects that shipments will total about 680 billion cubic feet in 2008, a 12 percent decline from last year.
  • Also, the rising prices of crude oil, which usually doesn’t affect natural gas significantly, is having an impact. But as the price of oil rises, trading and demand for natural gas have been rising. “You’re starting to see a global market for natural gas, diesel, and oil,” Mr. Halloran said.

US decreasing imports of LNG because prices elsewhere are higher April 8 2008

  • [Arguing roughly the same as the previous article]
  • 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.

LNG could salvage China April 19 2008

  • [Environment in China screams for gas and that will increase demand over supply even more for the coming years]
  • 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.
  • 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.

Primer on natural gas by professor April 15 2008

  • [Long-term trend in gas is up as demand for clean energy is unstoppable and market liberalization has adverse effects]
  • According to the International Energy Agency [IEA] of the OECD, fossil fuels will account for 90% of the world primary energy mix by 2020. 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%. An earlier estimate had the average global gas production increasing by 2.75%/y until at least 2025, and gas quickly overtaking coal in the global energy picture. This no longer sounds right, nor does an absurd forecast the IEA which envisaged the global consumption of oil in 2030 reaching 120mb/d.
  • World gas prices might already be on an unambiguous upward trend. In picturing world gas prices remaining flat until 2005, the IEA was clearly mistaken, but they are correct in noting that a tightening of U.S. and Canadian gas supplies is unavoidable, and this process could turn out to be very unpleasant for buyers. A wellhead price of $2.5/mBtu (in 1997 prices) for purely conventional U.S. gas in 2020 seemed offbeat to me when it was predicted at the beginning of this century, and unless the global macroeconomy greatly deteriorates, a sustainable gas price of at least $10/Mcf could be experienced before the end of this year, with occasional ‘spikes’ that carried the price well above that figure. Bargain basement oil has gone out of style, and the same is going to happen with gas.
  • Probably the most important observation on the ambitions of natural gas deregulators was rendered by Professor David Teece of the University of California (1990). According to him, market liberalization in the U.S. has already “jeopardized long-term supply security and created certain inefficiencies.” He also notes that “While more flexible, a series of end-to-end, short-term contracts are not a substitute for vertical integration, since the incentives of the parties are different and contract terms can be renegotiated at the time of contract renewable. There is no guarantee that contracting parties will be dealing with each other over the long term, and that specialized irreversible investments can be efficiently and competitively utilized.” For this reason I never miss an opportunity to remind my students that as far as I am concerned, large and complex gas systems operating in a climate of uncertainty are most efficiently run on an integrated basis that emphasises long-term contracting. This kind of arrangement promotes optimally dimensioned installations, and although it may not be mentioned in your economics textbook, if pipeline-compressor-processing systems which fully exploit increasing returns to scale in order to obtain minimum costs are to be readily financed and expediently constructed, then – as I interpret the evidence – the kind of uncertainties associated with short to medium term arrangements should be kept to a minimum. Failing to do so could cause a reduction in physical investment, and in the long run lead to higher rather than lower prices.
  • 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.

Rising ING demand in Asia, declining production in Indonesia and rising prices 31/3/08

  • [Indonesia, the regions biggest exporter of natural gas, is cutting back. We published this earlier here, with some speculations as to who might be interested in InterOil’s LNG facility]
  • Indonesia, the world’s third- largest exporter of liquefied natural gas, will get record price for the fuel supplied to Japan in a contract extension starting 2011 as buyers seek to secure supply amid rising demand.
  • The Southeast Asian nation has contracts with a group of Japanese utilities including Kansai Electric Power Co. and Osaka Gas Co. to supply a total of 12 million metric tons of LNG a year, which will expire by March 2011. The Southeast Asian nation will cut LNG supply to Japan by 75 percent to 3 million tons a year for the first five years after current contracts expire, Takhyan said. The supply will be reduced to 2 million tons annually in the five years after that.
  • 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

Supply problems in many parts of the world

  • [Part of ‘political peak oil’ theory can be extended to the natural gas world, as it comes from countries were political problems cause serious doubt about their ability to guarantee supply]
  • AMSTERDAM ( — In its last report, the U.S. Department of Energy stated that the expected supply of Nigerian oil and gas in 2008 and 2009 could come under severe strains. Washington is concerned about Nigeria’s growing inability to make available surplus oil and gas supplies in the international market.

Supply problems in many parts of the world II

  • [Many problems in many countries..]
  • Growing nationalism in major gas producing countries, lack of progress on key pipeline projects in Asia and uncertainties surrounding gas-handling and internal transmission issues in China and India overall paint a disturbing picture for the global natural gas industry.
  • Increasing intervention of the Russian government in gas production and export is a cause of concern (especially as the country sits on the world’s largest proven reserves), warned a UK-based energy expert addressing the concluding session of the 12th Middle East Gas Summit here yesterday.

Origin Energy Rejects BG’s $13 Billion Takeover Offer

  • [We’ve posted parts of it in a valuation update, here, note the enormous valuation gap between what Petronas paid for a Santos field, and how Raymond James values the gas at InterOil. Our article also goes into the reasons, but here is the original Bloomberg article.]
  • May 30 (Bloomberg) — Origin Energy Ltd., Australia’s biggest producer of natural gas from coal seams, rejected a higher, A$13.6 billion ($13 billion) takeover offer from BG Group Plc, citing the increased value of its reserves.
  • LNG demand is set to increase by 10 percent a year through 2015, more than five times the estimated gains in crude oil, as power producers switch to cleaner fuels, according to Citigroup Inc.
  • Petronas yesterday agreed to pay A$4.91 a gigajoule for proven and probable coal seam gas reserves from Adelaide-based Santos, which Santos Acting Chief Executive David Knox said sets “a new benchmark” for reserves valuations.

Record prices for LNG in Asia

  • [More noteworthy, this is no spot price, but for long-term supply]
  • Indonesian officials said Korea Gas Corp. (KoGas), bowing to threats of delays, has agreed to purchase LNG from the Tangguh project at a record price of $20/Mmbtu. “We haven’t signed a legal document yet, but we have agreed on the price,” said Eddy Purwanto, deputy of operations for the country’s upstream regulatory agency, BPMigas. Purwanto said the price was the highest of any existing gas field in the country, including Arun and Bontang. Purwanto said the amount of LNG to be purchased by Kogas was still under negotiation, but that purchases would begin during 2010-12. He said the price is based on the Japan Crude Cocktail (JCC) oil price of $120/bbl.

More record prices for gas

  • China paid record prices for three liquefied natural gas spot cargoes last month as demand for the fuel increased in the world’s fastest-growing major economy. The second-largest energy consuming nation paid Nigeria $15.46 per million British thermal units, Egypt $15.37 and Algeria $15.39 for each individual LNG cargo, Bloomberg calculations based on customs figures released in Beijing today show. That exceeds the $14.35 per million Btu China paid Nigeria for LNG in June.

Gas cheap in relation to oil

  • [We’ve posted this earlier}
  • We’ve found a couple of interesting articles today on the oil and natural gas markets. Since we advise a position in InterOil, which despite it’s name is a natural gas, not (at least not yet) an oil play, we’re more than a little interested.

Gas cheap in relation to oil II

  • A recent Wall Street Journal article reported that natural gas prices are cheap relative to crude oil. The article’s expert sources claim, in fact, that natural gas futures are trading at some of the steepest discounts seen in several years. Now, it’s not easy to judge the relative value of these fuels due to their pricing conventions. Oil is priced in dollars per barrel, while natural gas is denominated in dollars per million British thermal units (mmBTU). One way to rationalize prices is to reduce crude’s value to its energy equivalence. One barrel of crude, on average, supplies 5.8 mmBTU. Divide crude’s price by 5.8 and you’ll see its thermal energy value. Energy Equivalence
  • As an example, NYMEX spot crude closed at $115.29 per barrel on August 28. The contract’s energy- equivalent price was $19.88 per mmBTU. Meanwhile, the nearby natural gas contract settled at $8.05 per mmBTU, the energy equivalence of crude at $46.69 per barrel. From this perspective, natural gas is selling for 41% the price of oil.

If you have trouble with all the measurements:

Energy and price conversions [the numerical example comes from Petronas buying a field from Santos]
A$4.91 a gigajoule is 4.91 x 0.95 = $4.31 per gigajoule
1 gigajoule = 1000cf
So 1000cf of proven and probable reserves trade at $4.3
1Bcf = $4.3M
10Tcf = $43B
The gross heat of combustion of one normal cubic meter of commercial quality natural gas is around 39 megajoules (?10.8 kWh), but this can vary by several percent.
1,000 cubic feet = 28 m³
1m3 = (1000/28) 35.714 cf = 39 megajoules
1cf = (39/35.714) = 1.092 megajoule
1cf = 0.1781076 oil barrels;
1Bcf = 178M oil barrels
The typical caloric value of natural gas is roughly 1,000 BTU per cubic foot. This corresponds to around $7 per million BTU’s, or around $7 per gigajoule
So 1M BTU’s = 1 gigajoule = 1000cf

Tags: IOC

4 responses so far ↓

  • 1 Jim Tate // Sep 2, 2008 at 12:35 am

    So Phil said IOC had 14 T’s to a Reuters reporter this week. That $60 Billion approx..IOC curent market cap is $1 billion…We may have some upside here…

  • 2 Starters kit for InterOil // Sep 7, 2008 at 5:15 am

    […] Several articles indicating natural gas is in very short supply in Asia […]

  • 3 Sell-off in InterOil. // Oct 8, 2008 at 5:50 pm

    […] have no reason to think that the picture has changed in a fundamental way. Gas is still badly needed in Asia, if anything, because of rather large cost advantages compared to coal seam gas projects in Australia, this […]

  • 4 Charles Wilson // Jun 30, 2009 at 10:21 pm

    1 cf = .17 barrel ? … yet above, you have a barrel selling for 6 times an Mcf = 1000 cf
    The M is: Milli = 1000.
    Thus an Mcf, not a cf, is = .17 barrel. Otherwise OK.