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Origin, Santos, Woodside: Are they at risk from North American gas?

Deciphering all the moving parts to Australia’s gas industry is hard enough let alone considering the global supply and demand imbalances and what that means for future prices; which is why it is tough for investors right now to get a clear picture on just how large the opportunity is for Australia’s gas majors.

Domestic scene

On the domestic scene there are a couple of major issues. One relates to coal seam gas (CSG) extraction. NSW and Victoria have both imposed moratoriums on CSG development due to environmental concerns surrounding the extraction used to capture CSG, resulting in lower supply than there otherwise would be.

At the same time, major LNG trains are being built in Queensland to process gas for export. On Curtis Island near Gladstone Santos (ASX: STO) has a 30% share of the GLNG project, while Australia Pacific LNG, which is a joint venture with Origin Energy (ASX: ORG), is also building a multi-train facility on Curtis Island. These trains will for the first time create the opportunity for east coast producers to become major exporters of LNG.

The opening up of export markets means that for the first time domestic gas users will have to pay global pricing minus the transport and associated costs. Many interest groups are crying out that Australia is about to face a gas supply shortage, however this argument appears to be scaremongering. Rather, many of these groups are really either wanting to artificially lower the gas prices through a domestic quota system or they stand to gain financially from CSG development in NSW and Victoria.

International scene

With expectations that domestic prices will converge towards international price parity, the key for domestic producers becomes how global supply will be affected by other major gas hubs. As investors saw last week when Malaysian company Petronas announced plans to build a $37 billion LNG plant in Canada — and taking into account the excess supplies of shale gas in the USA which will soon begin to be exported — North America is shaping up to become a major exporter of LNG.

While Woodside Petroleum (ASX: WPL) was reported in the Australian Financial Review as saying it expects “US exports will remain limited to about 50 million tonnes a year by 2025 and will not be much cheaper than Australian supplies”  it’s quite possible that future gas prices will be lower than today due to increased global supply.

Foolish takeaway

For the established players with domestic projects about to come on line, there are reasonable expectations that these ventures should provide decent returns on capital. However the combination of the high price of doing business in Australia and the murky outlook as to what the future global LNG marketplace will look like means it could be quite some time before any further major domestic LNG projects get approved.

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Motley Fool contributor Tim McArthur owns shares in Origin Energy.

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