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What Malaysia’s $37 billion Canadian LNG play means for Santos

Malaysian Prime Minister Najib Razak has announced that state-owned energy company Petronas will invest $37 billion into a new LNG export project based in Prince Rupert, Canada. It is reported to be the largest direct investment into Canada by any country.

For Australian producers like Woodside Petroleum (ASX: WPL) and Santos (ASX: STO) the move once again places the spotlight on the threat of cheap LNG being produced in North America and Canada and being shipped to the growing Asia market.

The Petronas decision also suggests that Australia’s days of being a magnet for significant LNG project investment may be slowing as the reality of high comparative costs sets in. This means fewer jobs, and less economic boost for the Australian economy. Warnings have been sounded for years that higher costs of Australian LNG projects will decrease future investment because of the increased risk for new projects and the lower return on investment.

For LNG producers like Santos it is also a potential threat to LNG pricing. University of Western Australia economist Peter Hartley has told The Australian that there will likely be a downward influence on spot prices, but that this may not necessarily be as significant for producers with long-term supply contracts.

According to Professor Hartley this is because many LNG contracts are thought to be lower than current spot prices, which would reduce the impact on new contracts.

The new Prince Rupert project will have an annual production capacity of up to 18 million tonnes of LNG from 2018 – five years away. By comparison, Santos’ US$19 billion PNG LNG project being operated by Oil Search (ASX: OSH) has a plant capacity of 6.9 million tonnes per annum (mtpa), while the Queensland-based GLNG project has an annual plant capacity of 7.8 mtpa.

Foolish takeaway

However, before you hit the sell button on those well considered Santos shares, it is worth knowing Santos isn’t worried. The company recently cited a report by consulting firm Wood Mackenzie that indicated by 2025 US LNG will contribute up to 36% of the total contestable market for LNG, leaving up to 100 million tonnes per year (mtpa) to be produced from other sources.

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

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