There was a warning hidden among the 140-odd pages of Woodside Petroleum Limited's (ASX: WPL) 2014 Annual Report.
Based on current industry forecasts, Woodside noted that the current crisis in oil prices could result in a short-fall in LNG production from 2022 as new projects are delayed, putting upward pressure on long-term LNG prices. Investors willing to take the risk on growing LNG producers now could stand to profit big over the long term.
Woodside offer the following chart based on demand and supply forecasts by industry consultants WoodMackenzie: (FID = Final Investment Decision).
Source: Woodside Petroleum Limited 2014 Annual Report
Due to a lag in oil-linked LNG pricing, the current phase of lower oil prices will continue to push down revenues for LNG producers in the coming six months. Lower revenues mean less money available to reinvest in new, capital intensive LNG projects and less enthusiasm from company shareholders to support the ventures. The delay in new projects will push out new supply options required to meet growing LNG demand.
Woodside itself has postponed the final investment decision (FID) on its Browse floating LNG production vessel until mid-2016, a project with an estimated life of 40-50 years.
While 2022 might seem far away, it's only seven years and given the time required to bring new LNG production online seven years is not long. Woodside's Pluto LNG took five years from approval to production, while Santos Ltd's (ASX: STO) GLNG joint venture was approved by shareholders in January 2011, with first production expected in the second half of 2015; around four-and-a-half-years on.
The conclusion for investors is that despite the current fall in oil prices, LNG focused companies like Woodside, Santos, Drillsearch Energy Limited (ASX: DLS) and Senex Energy Ltd (ASX: SXY), could be set to profit from a short-fall in LNG supply in the long term.
Add to this the current weakness in energy producer share prices and adding exposure to LNG in 2015 could be a smart move in coming years.
