$20 per Mcf, can that be real?
Chinese Sinopec purchased a 15% stake for $1.5B and a 20 year offtake deal for $83.5B from ConocoPhillips/Origin in Australia. Here is the Reuters article.  Some points:

Sinopec’s deal to take at least 4.3 million mtpa could be worth around $85 billion if pricing is similar to that of recent coal-seam gas supply deals done by Australian gas firm Santos (STO.AX), said CLSA analyst Mark Samter.

Let’s reflect on that. What’s the price per Mcf of this?

• Virtually all the $85B is for the 20 year 4.3mtpa offtake deal
• That’s 86mt at $83.5B, or just under $1B per million mt
• 1metric ton LNG = 48,700 cf or 48.7Mcf
• 1 millionmt LNG = 48.7Bcf which sells for almost $1B
• 1Bcf = 1/48.7 = $20.5M, sooo
• 1Mcf sells for $20 (rounded downwards as a mmt sells for just under $1B)

We repeat, that’s 20 bucks per Mcf. This is probably a little overstatement as the article speaks of “at least 4.3million mtpa”, so there could be more gas involved.

But still. This is double from where we think IOC’s offtake deals were heading ($10 per Mcf was basically our base case)

Take also the following into consideration:

1. Coalseam gas doesn’t flow, it has to be made to flow and wells peter out pretty quickly, hence a lot have to be drilled, treated, and manned. In Conoco/Origins’ case, 20,500 wells
2. Coalseam gas is usually dry gas (no liquids to boost the returns) and has relatively low caloric value (many Japanese utilities don’t even use it for these reasons)
3. This is Australia, a high-cost, high-regulation environment
4. While capex requirements for InterOil are minimal as others will build and finance their plants and they’ve already have (most, if not all) the money for the infrastructure (jetty and pipelines), these coalseam projects are very expensive projects that can easily reach $10B or more

From the Reuters article again:

The price of $1.5 billion for the 15 percent stake is also well above similar deals made recently– state-run Korea Gas Corp (KOGAS) (036460.KS) paid just over $600 million in cash to buy a 15 percent stake from Australian energy firm Santos (STO.AX) and Malaysia’s Petronas PETR.UL.

So, all in all, we have:

• Off-take deals are returning to Asia, the “gas glut” must be closing
• The numbers on the deals are much stronger than most expected (certainly us, we have to admit), further reinforcing the first point that sellers’ position seems to be strengthening.

Perhaps that’s because of this:

China aims to boost gas consumption to 10 percent of its total energy use by 2020 as it tries to reduce greenhouse gas emissions by cutting the use of dirtier burning coal. It has spent tens of billions of dollars buying into energy resources from Africa to Latin America. Energy consultancy Wood Mackenzie has forecast China’s LNG imports to rise five-fold to 46 million tonnes by 2020.