It is the task of today’s Money Weekend to predict the future, which is a fool’s errand. But the point in trying, for investors, is to get ahead of the big trends and profit from them before they’re obvious.
With energy, that means looking not just years out, but decades. Where will the demand come from? And more importantly, where will the supply come from? If you can figure that out, you stand a chance to make some far-sighted investments that could begin delivering profits today. The financial stakes are high for entire countries as well. Cheap energy is the ultimate competitive advantage.
But before that, doesn’t the news just keep flying out of Tokyo? In the last few months, the Japanese politicians have managed to debase their currency, pump up their zombie stock market and strip away any pretence of an independent central bank – all with a straight face.
Since November last year, the Nikkei index of Japanese stocks has rallied over 30% to its highest point since 2008. The yen has fallen 18% against the US dollar. Japan’s new central bank governor, Haruhiko Kuroda, is all set to renew the two decade-long fight with deflation in Japan. He ‘is expected to begin buying trillions of yen more in bonds, along with other moves,’ according to the Wall Street Journal.
Now comes news of a possible breakthrough in the energy market: ‘flammable ice’.
A New Source of Energy
Two weeks ago, a Japanese drilling team extracted natural gas from deposits of methane hydrate trapped under the seabed off the coast of Japan. According to energy company Royal Dutch/Shell, a methane hydrate consists of methane gas trapped in ice-like structures of water molecules. They’re thought to be abundant around the world.
The Japanese regard the result as a world first. It’s still very early days yet, of course. The Japanese government puts commercial production at least five years away, and there are technical and environmental hurdles to clear. But it might be a key breakthrough in tapping an alternative energy source in the oil and gas industry. This is something Japan needs.
Japan’s Achilles heel has always been an almost complete lack of natural resources to fuel its huge manufacturing base. It has to import practically every raw material. But with its trade surplus now gone, the cost of those imports is mounting. This is especially true when it comes to energy, which brings us to the Australian investment angle.
The Fukushima disaster meant shutting down almost all of Japan’s nuclear reactors. With barely any domestic power source, Japan has to import Liquefied Natural Gas (LNG). In fact, Japan is the world’s biggest importer of LNG. And it gets the majority from Australia. That’s good news for Aussie producers.
Of course, this has put a huge level of demand into the market. Reuters reported in January that, ‘Japan’s LNG imports soared 11.2 percent to a record high of 87.31 million tonnes in 2012.’
And the latest news isn’t getting much better for Japan, either. ‘Japan recorded a trade deficit of 777.5 billion yen ($8.1 billion) in February despite the weaker yen as exports of cars and auto parts slipped while energy-related imports surged nearly 12 percent,’ reported the Associated Press on Thursday.
For the moment, demand for Australian natural gas is putting pressure on prices at home. On the front page of the weekend Australian Financial Review recently was this headline: ‘Consumers and business face the prospect of a new wave of power and gas price increases driven by shortages of natural gas’.
This is especially true for New South Wales and Queensland. Regulatory changes to the energy market are one reason for prices to rise. The second catalyst will be when the various LNG projects currently under construction around Gladstone, QLD, begin exporting gas within the next two years. All of that natural gas is marked for export.
Higher prices will always eventually bring in more supply. That’s the way markets work (if they’re allowed to work). But where will the natural gas come from? It probably won’t ever be methane hydrates in Australia, even if the industry turns out to be viable elsewhere. Estimated offshore deposits look very thin around our coast.
It might be shale gas. Our mate Dan Denning is telling anyone who’ll listen about the opportunities in this industry. In fact Dan was one of the first movers in recognising shale gas as an investable opportunity. He’s written about it since 2005.
If the shale gas resource estimates in Australia prove accurate, and the gas extractable, this industry can tap into the growing demand just when a sweet spot exists in the market. The potential could see Australia become an energy giant. Dan says the next six months are crucial for the shale gas industry. You can read his report to see why here.
The Future of the Natural Gas Market
Shale gas could play a key role in the future, according to energy major Royal Dutch/Shell. It recently released ‘New Lens Scenarios’, a trend analysis of the future energy market stretching into 2020 and 2030, even 2100. It’s a kind of thought exercise on plausible outcomes depending on a bunch of inputs.
Royal Dutch/Shell takes two views on the global energy revolution, the first called ‘Mountains’ and the other ‘Oceans’.
‘Mountains’ favours natural gas. It paints the following picture about the future: Shale and other unconventional sources play a big role as technology unlocks constant new supply of natural gas. It becomes the most important fuel on the planet. This plentiful gas can fuel entirely new markets and industries with cheaper energy. By 2030, gas knocks off oil as the largest global energy source.
The second scenario is ‘Oceans’. Here’s how that scenario pans out: there is sluggish energy supply in the face of rising demand, mainly from emerging economies. Oil and gas prices are high. OPEC holds a grip on low cost petroleum reserves.
The new major gas reserves never happened but natural gas is still in the top four energy sources. A variety of inputs in this scenario say solar will be the dominant global energy source in 100 years. But 100% renewable energy is still not on the table.
Royal Dutch/Shell isn’t the only one making predictions. ExxonMobil has released a similar report, too. Here’s a quick rundown of their take:
- Energy demand in emerging economies will rise 65% by 2040.
- Oil will remain the number one fuel but natural gas will be the fastest growing major source
- ‘Unconventional’ sources of fuel are critical to meet rising demand. By 2040, close to 80% of North American gas supplies will be from unconventional sources.
- Technology will enable development of once hard-to-produce resources.
Think Back on This in 2040
Hmm. Is it even fruitful to think about the future this far ahead? Predictions that turned out to be wrong, if not completely ridiculous, litter the record books. But these scenarios can at least show where the energy majors see the market going.
Oil and energy companies have to look years ahead in order to make plans. Every drop of oil produced and sold this year needs a new discovery to replace it. That’s not even considering growth in oil use. And not only do you spend billions of dollars exploring for it, there is hundreds of billions on long-life capital spending.
That’s why oil companies put so much thought into the future of supply and demand. If they get the trends wrong, they’ll go out of business. It’s telling, then, that natural gas plays such a key role in their long term forecasts.
The fact is that Australia has already replaced Qatar as Japan’s leading LNG supplier. The investment in the conventional LNG industry will begin to result in more gas exports in the next three years.
But beyond that, the total energy market is growing. And natural gas is commanding a larger percentage of the market. The chance is there for the taking for the Australian shale gas industry.
Callum Newman
Editor, Money Weekend
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