Why oil & gas investors should be shaking in their boots

Investing in oil and gas companies such as Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH) and Santos Ltd (ASX: STO) as well as integrated energy company Origin Energy Limited (ASX: ORG) is becoming more than anything a play on the future of Liquefied Natural Gas (LNG), with all 4 of these companies investing billions of dollars in developing a range of LNG projects.

So far the strategy appears to be paying off – from the market’s point of view at least – with each firm’s share price beating the 10.6% return from the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the past year.

While the line from these four companies is overwhelmingly positive about the future benefits which will accrue to shareholders, there is cause to be nervous that an adequate return on investment will be achieved…

Firstly, Russia and China just signed a gas deal muted to be worth around US$400 billion which will see Russia supply gas to China at an estimated price of US$9.90 per unit (MMBTU). In comparison Australian LNG is estimated to cost around US$13 per unit.

Secondly, it’s not just the cut price supply deal with Russia that will impact globally traded LNG prices, but also the significantly lower cost structure of the United States burgeoning shale gas industry which is rapidly converting LNG import terminals into LNG export terminals.

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For oil & gas investors the devil will be in the detail. If Woodside, Oil Search, Santos and Origin have signed attractively-priced contracts then they should be ok, but in a world of lower LNG prices, the risks appear to be mounting against Australia’s LNG producers.

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Motley Fool contributor Tim McArthur owns shares in Origin Energy Ltd.

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