Market disruptor: nuclear restarts spell trouble for LNG

There are two major factors that have emerged in the last five years that have sparked a surge in LNG investments. First is the shale gas "revolution" in the United States, which allowed the U.S. to vault to the top spot in the world for natural gas production. This caused prices to crater to below $2 per million Btu (MMBTu) in 2012, down from their 2008 highs above $10/MMBtu. Natural gas became significantly cheaper in the U.S. than nearly everywhere else in the world.

The second major event that opened the floodgates for investment in new LNG capacity is the Fukushima nuclear crisis in Japan. Already the largest importer of LNG in the world before the triple meltdown in March 2011, Japan had to ratchet up LNG imports to make up for the power shortfall when it shut nearly all of its 49 gigawatts of nuclear capacity. In 2012, Japan accounted for 37% of total global LNG demand.

The combined effect of shale gas production in the U.S. and skyrocketing LNG demand from Japan opened up a wide gulf between the Henry Hub benchmark price in the U.S. and much higher oil-linked prices around the world. LNG markets, which are not liquid, could not meet the surge in Japanese demand. Platts' Japan/Korea Marker (JKM) price for spot LNG floated between $4-$10/MMBTu the year and half before Fukushima. In the few months after the meltdown, the JKM price quickly jumped to $18/MMBTu. Almost three years later, the JKM price for month-ahead delivery in January 2014 hit $18.95/MMBTu.

In contrast, Henry Hub prices – despite reaching a more than two year high – were only $4.50/MMBTu for the first week of 2014. After factoring in the costs of liquefaction and transportation – somewhere in the range of $4-$5/MMBTu – companies could still make a substantial profit taking U.S. gas and exporting it to Asia.

Thus ensued a scramble to permit and build LNG export facilities in the U.S., often by retooling and turning around what were once import terminals. As of December 6, 2013, the U.S. Department of Energy had 28 applications for LNG export facilities to countries without which the U.S. has a free-trade agreement (five of them have been approved).

Cheniere Energy (NYSE: LNG) has been the primary beneficiary of DOE's policy to incrementally approve LNG exports. Cheniere has already signed contracts to deliver gas to Britain's BG Group, France's Total, India's Gail, Spain's Gas Natural Fenosa, and South Korea's Kogas. Its stock price has soared since it received permission to begin construction on its Sabine Pass liquefaction facility on the U.S. Gulf Coast, which would allow the export of 18 million tonnes of LNG per annum (MTPA) in Phase 1. From August 6, 2012 – the day before it received its permit – until the market close of January 10, 2014, Cheniere's stock price climbed from $14.66 to $46.37 per share, more than a three-fold increase.

Other companies are lobbying the government to quickly approve more export terminals, but it is more than likely that only the first-movers will make some serious money with the stragglers left behind. While its competitors are awaiting permit approvals, construction is already underway at Cheniere's Sabine Pass liquefaction facility.

LNG Expansions Around the World

Australia plans to triple its LNG capacity over the coming four or five years, which will allow it to surpass Qatar as the largest LNG exporter in the world. There are seven liquefaction facilities under construction in Australia, with a capacity of 62 million tonnes per year. This means that by 2017, according to the International Gas Union (IGU), Australia's LNG export capacity will reach 83 MTPA.

Australia's projects are further along and closer to their target market of Japan, so many will beat out U.S. proposals. Despite all the buzz in the U.S. about LNG export terminals, and the more than 190 MTPA of applications on backlog with the DOE, very little of that will be actually constructed (it is pretty easy to merely submit an application). The IGU estimates the U.S. will only bring online an additional 8 MTPA or so over the next four to five years, up from about 2 MTPA last year. Australia is where the action is.

Chevron (NYSE: CVX) is heavily invested in Australian LNG and already has several terminals up and running with more capacity coming online in 2015. BG Group (LON: BG) is scheduled to start exports of LNG at its Queensland Curtis facility this year. These companies are well-positioned to serve the insatiable demand from Japan.

Market Disruptor – Japan's Nuclear Restarts