Japan and Middle East – Away from Oil and Nuclearon Friday, 25 March 2011. Posted in Economic Commentary, Global Markets, Market Flash
The recent disaster in Japan and the Middle Eastern turmoil have changed the dynamics of the energy market in several ways. Firstly uranium fired nuclear power stations are under intense scrutiny and doubt, not just in Japan, but also future behemoths of India and China, not to mention current ones in Europe and the US. Secondly, the normal energy replacement being oil, predominantly out of a Middle East that is more turbulent than ever (and seemingly getting worse), means that affordable oil seems unlikely.
Cleaner but Economic
Natural Gas is our focus as a replacement energy. It’s understood and cleaner than coal, and can also be used for vehicle fuel, unlike coal. It’s economic and scaleable unlike the cleaner technologies of solar or wind and can provide a larger base load than hydro power, where further dams is limited. Natural gas, like oil, isn’t a pure global market, but rather regional or hemispheric markets. This is due to transport costs, which can be high for this commodity which combines bulk with difficulty in handling.
Focus on Asia
For the purposes of brevity, we will focus on the Asian natural gas market and the opportunities there due to the rate of growth, the location of China and India which will drive future demand. China had planned dozens of nuclear power stations, but that is now paused an under review not to mention India’s needs to power its growth. Japan needs to replace at least 14 nuclear power stations to reduce and stop the rolling electricity outages that are currently plaguing the country.
The Challenge: Clean simple correlation
The problems however in gas, like many commodities particularly oil, is finding clean exposure or correlation with the underlying commodity. Many big producers like BP or Chevron are very diversified across many activities and countries around the world. Political problems in Russia or an exploded rig in the gulf just to name two recent examples, can significantly affect investment returns despite any profitable success they may have in Asia.
Many other large producers such as Petrobas in Malaysia for example are state owned and buying a share is simply not possible. Worse, index funds invest in gas futures, and can quite often have large running costs making investment return correlation poor.
The Projects and Players
Due to the size of investment required in either onshore or offshore gas plants, even the large diversified energy giants frequently do joint ventures to develop a deposit. So this research will consider natural gas opportunities by project, to see what opportunities it throws up.
Russian Siberia (North of Japan)
Sakhalin II – Gazprom, Royal Dutch Shell, Mitsui, Mitsubishi
Serono Toili LNG – PT Pertamina (Persero), PT Medco E&P Tomori Sulawesi
Projects owned by Petrobas, State Owned
Brunei & Thailand
Projects owned by Government
Sunrise Field (Proposed) – Royal Dutch Shell, Woodside
Baya-Undan, Darwin LNG – ConocoPhillips, ENI, Santos, Inpec, Tokyo Electric Power (TEP)
Papua New Guinea
Liquid Niugini LNG (under development) – InterOil Corp, Merrill Lynch Commodities, Pacific LNG Operations
PNG-Hides Field (Proposed) – ExxonMobil, Oil Search Limited, Santos
Australian Gas Projects
North West Shelf – Partners – Woodside, BHP Billiton, BP, Chevron, Royal Dutch Shell
BurrupPark-Pluto (under development) – Woodside, Royal Dutch Shell
Gorgon (under development) – Chevron, Exxon Mobil, Royal Dutch Shell, Osaka Gas (1.25%)
Gladstone LNG (under development) – Santos, Petronas
Queensland Curtis LNG – BG Group
Major Gas Contractors in Asia
Bechtel (Privately Owned)
Leighton Contractors (LEI:ASX)
Kellogg, Brown and Root (Privately Owned)
JGC Corporation (TYO:1963)
Producers: Santos (ASX: STO) & Woodside (ASX: WPL)
Unlike global players, these two producers gain a significant share of their revenue from gas production in the Asian region, although Santos also has retail operations and Woodside also has oil. Woodside seems the cheaper of the two from a very cursory glance at a price to earnings ration of 20 versus 25 for Santos, but neither are expensive if projects are completed and demand and prices remains strong as expected. Both are up this year, 16% for Santos and 7% for Woodside, but neither gains are excessive given the change in global circumstances. The projects owned in Australia are sold typically to Japan in the past, but increasingly to China and there has been interest from Indonesia as well.
Contractors: Leighton Contractors (ASX: LEI) & JGC Corporation (TYO:1963)
Contractors to the Oil and Gas industry seem to be frequently private companies, but these are two of the biggest. A cursory inspection indicates that both are reasonable picks. Leighton has a PE of 15 and a dividend yield of 5% with recent falls being attributed to losses surrounding the recent Queensland floods, a situation that is now in the past. JGC Corporation may also benefit from natural disasters as there seems scope for benefit in the rebuilding effort in Japan, although company growth appears fairly pedestrian with minimal stock market gains, or even volatility, during boom energy times.
Other Producers are either multinational producers or state owned.
Oil Search: Junior Explorer Producer. Seems risky and volatile with high price to earnings ratio. More research would be required for an investment.
Apache: Established Producer with an acceptable price to earnings ratio so may be acceptable investment with further research. The majority of operations in US makes it uncorrelated with Asian demand and outside the scope of this report.
Why Not an ETF?
ETF’s in pure futures markets like oil and gas face problems with rolling futures contracts. See more about this problem here:
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