Australian natural gas companies such as Santos Limited (ASX: STO) and Origin Energy Limited (ASX: ORG) are well positioned to profit once the three big liquefied natural gas (LNG) export facilities at Gladstone are complete. When that happens, probably in 2015, the companies will have a choice; they can either sell gas to domestic customers, or to international customers.
To quote The Australian: “The LNG projects are all about capturing prices that are up to three times as much as gas in the domestic market (about $12 a gigajoule before processing and shipping costs, versus $4).”
My tip is that you shouldn’t own shares in any manufacturing company that is exposed to soaring natural gas prices, unless it has already tackled this threat, head on. One example of a manufacturer securing supplies in advance is Orica Limited (ASX: ORI), which has done a deal with Cooper Basin hopeful Strike Energy Ltd (ASX: STX). I’m concerned by how exposure to the international price will hurt Australian businesses, especially manufacturing. The increased costs will be significant.
While soaring gas prices beyond 2015 are fait accompli, in my opinion, there is less certainty about where the gas will come from. At present, gas extractors are hoping to extensively exploit the reserves of coal seam gas along the east coast of Australia. Santos also has significant shale reserves in the Cooper Basin, but they are far from the east coast export terminal.
This plan to extract coal seam gas in Queensland and NSW took a hit recently. The Sydney Morning Herald reported that: “A coal seam gas project operated by energy company Santos in north-western NSW has contaminated a nearby aquifer, with uranium at levels 20 times higher than safe drinking water guidelines, an official investigation has found.”
This is significant, because community opposition to coal seam gas is growing; the issue has united environmentalists, farmers and even conservative commentator Alan Jones. This revelation is “the first government-endorsed proof that coal seam gas extraction can poison groundwater.” Investors should be aware that while gas profits are sure to soar, the companies planning to milk east coast gas supplies for years to come may not be able to carry out their plans without significant opposition, possibly resulting in lower profits.
The beneficiaries from opposition to coal seam gas are likely to be companies with shale gas deposits in the red centre, such as Senex Energy Ltd (ASX: SXY) and Beach Energy Limited (ASX: BPT). These companies will benefit from a soaring gas price, but face lower regulatory risk, because their tenements don’t fall on Australia’s scarce productive farmland. For my money, Beach Energy is one of the best resource plays on the ASX. According to some analysis, Adelaide gas prices might even be higher than east coast prices, further advantaging these two companies. I confess shale gas was one of my early interests as an investor, but since then, I’ve modified my approach. I now focus on stocks with tailwinds without commodity risk.