Musings from the Oil Patch
Comment of the Day

April 23 2013

Commentary by Eoin Treacy

Musings from the Oil Patch

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An equally important energy trade is the flow of liquefied natural gas (LNG), much of which comes from Australia and Southeast Asia, but with a growing volume coming from the Middle East. LNG is likely to become an important fuel for China who has relied upon coal-fired electricity to power its economy with the attendant problem of serious pollution problems in its major cities. In 2011, China imported 12 million metric tons (mts) of LNG, equivalent to 1.5 billion cubic feet per day (Bcf/d). China was projected to import 16 million mts in 2012, or roughly 2.0 Bcf/d, and to reach Japan's 56.6 million mts of LNG consumed in 2012 by 2020. To handle that increased volume, China is planning to construct 15 new LNG receiving terminals to go along with the five already in operation. Given the North American shale revolution, the potential for LNG exports from Canada and the United States has become a real possibility. The opening of a widened Panama Canal by 2015 means LNG carriers coming out of the Gulf of Mexico will have a shorter shipping route to Asia then if they were forced to circle South America in order to reach the Pacific market. Two other developing natural gas industry trends will also impact the global flow of LNG. One is the development of the recent huge gas discoveries in East Africa. The Asian region is the target market for the natural gas recently found offshore Mozambique and Tanzania, but the energy industry is also excited about exploration opportunities in Madagascar, Kenya and Uganda, any and all of which would likely flow to Asia.

Longer term there is also the wildcard of China's gas shale potential. Estimates are that China has the world's largest shale gas resources. If it successfully develops these resources, China could rapidly shift from being an LNG importer to becoming an LNG exporter. Both situations put a premium on China being able to insure the safe passage of LNG tankers, either to terminals in China to offload cargos or to load cargos destined for world markets.

Eoin Treacy's view Natural gas is increasingly tradable commodity, globally . This represents a significant evolution for the energy sector and the implications for energy prices are likely to exhibit a downward bias over the coming decades. The supply outlook for natural gas remains on a growth trajectory. If the trend of setting prices independently of Brent crude oil picks up, there is considerable room for gas to displace oil in Asia. In addition to rising standards of living across the region, this should help to spur demand growth over the medium to long-term.

Transporting LNG between continents most often requires tankers and the number of companies offering exposure to the sector is comparatively small. Exmar is listed in Belgium and yields 7.1%. The share has fallen over the last two months to test the region of the 200-day MA and it will need to find support in the current area if the medium-term upside is to be given the benefit of the doubt.

Teekay LNG LP is a US listed Master Limited Partnership and yields 6.52%. The share has been ranging, mostly with an upward bias since 2011 and is currently testing its peak. A sustained move below $39 would be required to question medium-term scope for additional upside.

Golar LNG has fallen back to test the region of the 2012 lows and will need to sustain a move above $37.75 to question potential for a further test of underlying trading.

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