Natural Gas Prices (CAD/MMBTU – June 2018)
It is difficult to compete on a global scale when Canadian natural gas producers receive 9-12x less than Asia and 2-4x less than their neighbor to the south. As a result, the return from Canadian producers has underperformed relative to the rest of the industry.
Canada Natural Gas Producers – Compared to AMEX Oil & Gas Index (2016-Present)
In addition to the overall demand, the price differential between the Asian and Canadian markets exists because of the large capital costs associated with connecting two different environments, one of scarcity and the other of abundance. LNG has been able to bridge this gap in some markets, yet those trying to export North American natural gas have sat idle (not by choice) and watched as Australia and to some extent the United States have ramped up LNG production and exports to service the Asian markets. So much so, the Australian government has implemented legislation to ensure domestic gas security is maintained.
To summarize, Canada’s gas has no place to go and as a result is receiving a bad reputation in the investment community. However, across the pacific another story has development. Gas isn’t good, it’s great! Aside from the fact it burns cleaner than coal, two main factors tell the story:
1. The Obvious – Increase in demand: By 2040, natural gas demand is expected to more than double. (ASEAN Center for Energy, 2017).
ASEAN Natural Gas Demand Projection
The growth will be driven by electricity generation and industrial use; however, this may see some competition if prices rise significantly as emerging countries within ASEAN may look to gas’ alternative, coal, whose demand is also expected to grow over the next 30 years at a similar rate.
2. The not so obvious – LNG Exports: The ability to export natural gas to other gas demand centres and access the premium price puts upward pressure on ASEAN prices as well. Indonesia and Malaysia both export LNG to Japan, China and South Korea. Collectively shipping ~26 MTPA in 2017.
Indonesia & Malaysia LNG Exports (2017)
Source: (International Gas Union, 2018)
With these two factors in play, natural gas has a bright future in ASEAN. Producers will continue to be incentivized to supply domestic demand growth while knowing that any gas that can be tied to LNG will receive a premium as it is sold to their northern neighbors.
Now only one question remains: how can investors capitalize on the natural gas demand growth in ASEAN (and arguably, globally)? I won’t pretend to have the exact answer, but a few ideas come to mind:
- Be patient and focus on Canadian producers directly impacted by Shell’s Kitimat project or other proposed LNG developments. While potentially a long game, feedstock for the LNG facilities will come from North East BC producers that will benefit from the access to a higher price.
- Global LNG companies: LNG is consistently priced at a premium and is linked to large developments in Japan, China and South Korea. Royal Dutch Shell is the global leader in LNG and many Australian companies are shifting their portfolios and capital to focus solely on LNG developments on the NW Shelf.
- Producers within the ASEAN region: This could provide immediate returns; however, it is not abundantly clear which companies or sectors to focus on. Most of the gas is produced by either international majors or national oil companies. IOC’s linked to gas production in the region include Chevron (Thailand), BP (Indonesia), ConocoPhillips (Indonesia) and Sapura Kencana (Malaysia) but these companies are diversified across many regions and sectors and therefore difficult to invest solely in ASEAN upside. Many of the SME’s within the region have prioritized oil development during the recent downturn and have created a void of a pure play gas producers in the region.
The emergence of LNG has made the high demand centres more accessible than before. Our next blog will be a focus on LNG trade within the region and its impact upon the potential LNG projects currently awaiting FID in Canada.
Matt Klukas is the CABC’s Energy Advisor and works for the Criterium Group, a management consulting and merchant capital firm focused on delivering creative, custom strategies and capital solutions across multiple industries. Matt is a registered Professional Geophysicist in the province of Alberta and received his MBA from the University of Calgary.
ASEAN Center for Energy. (2017). The 5th ASEAN Energy Outlook 2015-2040. Jakarta: ACE.
IEA. (2017). Southeast Asia Energy Outlook 2017.
IEA. (n.d.). International Energy Associate. Retrieved from Access to modern energy services in SE Asia.
International Gas Union. (2018). 2018 World LNG Report. IGU.
NEB. (2018, January 24). Market Snapshot: Why do Canadians use so much oil? Retrieved from https://www.neb-one.gc.ca/nrg/ntgrtd/mrkt/snpsht/2018/01-04whdcndnssl-eng.html?=undefined&wbdisable=true