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One big reason to buy BHP Billiton in 2014

Resources giant BHP Billiton (ASX: BHP) is the latest company aiming to dispel the rumour that significant increases in U.S. shale gas production will drag on Australian producers in the next five years.

BHP poured US$20 billion into U.S. shale gas in 2011 and expects it will start to turn out cash from next year. However there have been persistent fears from investors that the big growth in U.S. LNG export projects will result in production exceeding demand for LNG in the Asia region.

The U.S. government has approved the construction of five new LNG export terminals and it will be the first time the country has exported its natural gas production offshore. According to the Sydney Morning Herald, BHP believes that North America will supply 11% of Asia’s demand by 2030, while Australia will still supply up to 25%.

Asia is seen as the major growth region for LNG supply, with demand for cleaner forms of energy forecast to rise strongly over the next 20 years. Asia is also the major contract buyer for Australia’s LNG production and with significant new production set to come online over the next three years from projects by Santos (ASX: STO), BHP and Origin Energy (ASX: ORG), the fear is the extra supply may force down prices and reduce the return on investment.

In October this year Santos cited a report by consulting firm Wood Mackenzie that indicated by 2025 U.S. LNG will contribute up to 36% of the total contestable market for LNG, but will still leave up to 100 million tonnes per year (mtpa) to be produced from other sources. This suggests BHP will be in a prime position to win from both its Australia and U.S. LNG operations.

Asia’s massive growth in demand will likely help to protect prices from downward pressure. University of Western Australia economist Peter Hartley has previously told The Australian that although there will likely be a downward influence on spot prices from the increased supply of U.S. shale gas, producers with long-term supply contracts may not feel the impact as heavily.

Foolish takeaway

Both Santos and BHP are expected to capitalise on the significant increase in demand for natural gas from Asia over the next five years. Despite investor concerns that the increase in U.S. shale gas will place pressure on demand, producers have dismissed the fears and say its full steam ahead.

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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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