Santos: US LNG will not overwhelm the market

Relief for Australian LNG investors as record number of US export terminals get approved.

Despite a mixed week for Australian shares last week, leading oil and gas producer Santos (ASX: STO) was a standout performer with shares up almost 4%, hitting their highest level in over two years.

Part of last week’s rise may have been in response to a presentation by Santos which claimed that US LNG exports will not overwhelm the LNG market as many have feared. The company cited research by consulting firm Wood Mackenzie that suggests US LNG will only contribute up to 36% of the total contestable market demand by 2025, leaving up to 100 million tonnes per year (mtpa) to come from other sources.

To put this in context, the US$19 billion PNG LNG project being operated by Oil Search (ASX: OSH), in which Santos has a 13.5% stake, has a plant capacity of 6.9 mtpa, while the Queensland-based GLNG project has an annual plant capacity of 7.8 mtpa.

Currently in the US, four new export LNG projects have been approved. Three of these projects have already signed firm contracts to supply their LNG production to overseas buyers according to Reuters. Two additional projects, which have yet to receive approval, have also contracted out their capacity. The total volume of contracts signed for LNG supply come to 34 mtpa.

Of course this doesn’t factor in the expected increase in production from other countries getting in on the LNG game including Russia and East Africa. Both countries are seen to be attractive areas for investment with lower set up and production costs than in Australia.

The big risk for LNG producers like Santos and Woodside Petroleum (ASX: WPL) is the potential for falling LNG prices if supply is forecast to exceed demand. Already major LNG consumer Japan has started pressuring suppliers for lower contract prices based on the expected increases in supply.

Foolish takeaway

The news that the US is not expected to overwhelm the market is positive news for Santos and investors in other big LNG projects. Santos has already committed to several new LNG exploration projects and reliable pricing is one key requirement to ensure future project success.

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Motley Fool contributor Regan Pearson does not own shares in any company mentioned.

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