This morning we’re writing from the Platts LNG Forum in Sydney.
It’s only a small affair, but we wanted to get a feel for the latest vibe in the LNG (liquefied natural gas) market.
Our aim?
To bolster our case that we’re on the right track…that natural gas is set to be the number one growth commodity (perhaps the only growth commodity) over the next 20 years.
Of course, there’s a chance we’re wrong about natural gas.
But that’s OK.
Because we’ve prepared for that too…
So, let’s say we’re wrong.
Let’s say natural gas isn’t the energy of the future.
But if that turns out to be true, we have to figure out what will be the energy of the future.
Wind energy?
Solar energy?
Wave energy?
You know our position on those. We just don’t see how they’ll ever generate the same level of on-demand power supply as natural gas, oil or coal.
By 2010, wind power accounted for just 2.5% of the entire world’s electricity generation.
And a quarter of that capacity is in China, so when the Chinese economy does implode it’ll set the fledgling wind energy industry almost back to square one.
And with nuclear energy seemingly on the nose, the only other viable alternatives to natural gas are coal for electricity generation and oil products for transportation.
We don’t know much about the coal industry, so we’ll leave that to one side. Oil is something we do know a thing or two about.
For a start, we know that with the devaluation of the US dollar, oil has become a key currency in some parts of the world. As this report from El Universal notes:
‘The financial agreement between Venezuela and China was amended. Now, the instrument provides that, in order to pay back the three-year loans agreed with the Asian country, Venezuelan shipments of oil cannot be less than 230,000 bpd [barrels per day].’
China would rather have a set quantity of oil than a stack of devalued dollar bills.
So that’s it then.
Oil it is.
Or is it?
Marin Katusa over at Casey Research had some pretty interesting things to say about the oil market yesterday. Here’s a sample of what he wrote:
‘A decade ago it was standard for oil companies to assess a new project’s profitability using an oil price of US$17 to $20 per barrel. Prices had been at that level for many years, and most reservoirs were near surface and easy to access, which meant it often cost less than $10 to produce a barrel of oil.
‘Then we started to deplete the easy oil. The days when a company could simply prick the Earth’s crust in Texas or the Middle East and let the black gold gush became a fond memory. Instead, companies had to drill deeper to find oil, fracture tight rocks to enable oil to flow, figure out how to produce oil from reservoirs underneath several miles of water, or develop methods to separate sticky oil from sand. And production costs soared.
‘By 2008 the cost to produce a barrel of oil from a new project had climbed to between $50 and $75 per barrel. Today, it’s even worse.
‘New production from the Canadian oil sands and from Venezuela’s heavy oil deposits costs roughly $70 to $90 a barrel, all in. Deepwater oil production costs $70 to $85 per barrel. To produce oil from tight oil formations in the United States such as the Bakken shale costs at least $80 a barrel. And production from Arctic oil reservoirs, coal-to-liquids and gas-to-liquids projects, and biofuels are even more expensive.’
The high oil price had a dual function. It made previously uneconomical oil reserves viable, and it forced energy companies and energy users to look for other energy sources as an alternative to oil.
But here’s the interesting comparison. And it’s why we’ve put natural gas in the box seat.
Where new technologies and reserves have seen the cost of oil production rise and therefore kept the oil price high, the opposite has happened with natural gas.
New technologies and methods of exploiting gas, plus an increase in new reserves, have seen the North American natural gas price slump. It’s down more than 50% over the past 12 months.
So, while we like the oil story (we’ve backed a couple of oil stocks in Australian Small-Cap Investigator), we still take the view that the big advance will be in natural gas.
Oil will continue to be an important fuel for the rest of our lifetime. But with the development of shale gas reserves and the investment going into the LNG industry, our bet is natural gas is the only viable and cost-effective energy source for the 21st century.
But as we say, we could be wrong. We’ll see what the presenters at the Platts LNG Forum have to say and report back tomorrow.
Cheers,
Kris.
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