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Should you sell Santos and Origin?

It looks increasingly likely that Australia’s multibillion-dollar LNG projects will have to compete with the US for supply to Asia over the next decade after the US approved a huge new three-train LNG export terminal to be constructed on Louisiana’s Gulf Coast.

It is the third export terminal to be approved by the US as the country prepares to capitalize on the rush for unconventional shale gas produced by fracking. The terminal is not likely to be in production until at least 2018, but it will produce an additional 15 million tonnes of LNG per year according to The Australian.

This compares to the 25 million tonnes per year set to be produced by three of Australia’s largest LNG production projects in Queensland, including Origin Energy’s (ASX: ORG) APLNG project and Santos’s (ASX: STO) Gladstone LNG.

The Queensland projects, as well as several other including Woodside Petroleum’s (ASX: WPL) Pluto LNG, have resulted in estimates that Australia will overtake Qatar as the world’s largest LNG exporter by 2020, jumping from a ranking of seventh in 2010. This was fantastic news for investors in Australia’s LNG producers because it would see the value of LNG exports spike from $12 billion in 2012 to $45 billion in 2015 according to Commonwealth Bank of Australia (ASX: CBA).

However, US shale gas can be produced for as much as 30% less than Australian LNG because of lower labour and construction costs, giving the US the ability to sell to customers around the world at lower prices. This has the potential to reduce margins achieved by Australia’s LNG projects and could make plans to expand the projects in the future uneconomical.

For investors this is clearly less than ideal, but all is not lost. The continuing growth in demand out of Asia for energy, long lead times to get projects into production, and help from a falling Aussie dollar suggest Australia can maintain competitiveness.

Foolish takeaway

Investors need not sell out in alarm. Over the medium term, a third US LNG export terminal will likely have little impact on Australia’s forth coming LNG projects. Longer term, rising demand for energy out of Asia will likely play a large role in determining if further expansion is viable.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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