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Origin Energy and Santos to cash in on LNG exports

According to The Australian Financial Review, Gordon Cairns, the new chairman of Origin Energy (ASX: ORG), has called on governments to end energy price regulation and reduce red tape.

On Thursday 19 December, Origin announced the signing of a second major agreement to sell natural gas to the GLNG partners, an LNG project part-owned by Santos (ASX: STO). Along with Origin’s own APLNG project, the GLNG project will ramp up production in 2015, exposing the Australian gas market to the international price.

In the U.S., the amount of gas that can be exported is restricted, with the effect of lowering domestic prices, and investors should understand Origin’s opposition to regulation in this context. In Australia, gas prices are expected to skyrocket in the coming years, once exports begin in earnest, but there is some small risk that the government will seek to limit the rise in domestic prices. The CEO of AGL Energy (ASX: AGK), Michael Fraser, says that prices could rise above $10 per gigajoule, indicating that he expects prices may at least double in the next couple of years.

The Abbott government’s recent decision to kill the Clean Energy Finance Corporation (CEFC) may only increase Australia’s dependence on gas. Furthermore, there is no significant government policy to assist businesses to reduce their energy consumption. I would thus avoid any investment in a business that is exposed to high domestic gas prices (and has not yet secured supplies). Large gas users, such as Orica (ASX: ORI) have already moved to secure their supplies in the face of imminent price rises. Investors should be wary of investing in the manufacturing industry.

Origin’s coal seam gas (CSG) reserves will be extremely valuable once the domestic gas price is linked to the international price, and it is no surprise that the company would like to see an easing of regulatory restrictions exploiting those reserves. It would hurt the company if the government restricted exports, and it would help the company if it reduced environmental regulation of CSG extraction.

Foolish takeaway

It’s worth considering the possibility that export restrictions might one day be put in place, as that would be an effective way of reducing domestic energy costs. Many people believe that CSG extraction is too risky, as it has the potential to damage farmland. As a result, there is strong support for regulation of ‘fracking’ from farmers and environmentalists, alike. However, investors in Origin Energy will be pleased to know that the current government seems broadly supportive of their plans and it does, therefore, seem likely that the domestic gas price will be exposed to international prices from 2015.

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Motley Fool contributor Claude Walker (@claudedwalker) does not own shares in any of the companies mentioned in this article.

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