The Upside of Australia’s Surprising Decision to Restrict LNG Exports

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Oil & Gas

You would think Australia would be in the catbird seat when it comes to liquefied natural gas (LNG) exports.

With 132 trillion cubic feet (Tcf) of natural gas reserves, it’s the world’s second-biggest LNG exporter. Plus, it’s close to Asia, which uses 70% of the world’s LNG.

Yet, just a few days ago, Australia announced it will restrict LNG exports.

And someone will have to step up to meet growing global demands…

Investors, take note: This could be a boon to U.S. producers.

Australian LNG Exports: On the Rise No More?

Australia has emerged as a serious LNG exporter in recent years.

In 2015, it passed Malaysia as the world’s second-largest LNG exporter with 1.4 Tcf in LNG exports. In 2016, Australia’s LNG exports grew 50% to 2.1 Tcf.

The country has plans to build six new liquefaction plants. This would triple its natural gas liquefaction capacity to more than 13 billion cubic feet per day by 2020. In doing so, Australia would pass Qatar as the world’s largest LNG exporter.

And yet, its LNG is not affordable at home…

Australian natural gas exports have caused shortages during periods of high demand, driving up domestic prices.

What’s more, Australia has shut down of many of its coal-fired utility plants.

This has led to an unstable power grid. Utility companies now need more baseload capacity… and it’s going to come from natural gas.

Utility companies and others voiced their concerns to the Australian government… and the government responded.

A “gas security mechanism” will take effect by July 1, 2017, giving the Australian government the power to limit exports during periods of high demand and rising prices.

Prime Minister Malcolm Turnbull said in a statement, “It is unacceptable for Australia to become the world’s largest exporter of liquefied natural gas but not have enough domestic supply for Australian households and businesses.”

Up until now, development for Australia’s new LNG export terminals was on schedule. But that may change once developers better understand the export-limiting measure.

And since LNG exports usually sell via long-term contracts, any delay to the terminals could benefit U.S. LNG exporters…

Opportunity for This U.S. LNG Exporter?

When it comes to investing in U.S. LNG exports, there’s only one clear choice: Cheniere Energy (NYSE: LNG).

The foundation of Cheniere’s platform is two liquefaction facilities – the Sabine Pass LNG terminal and the Corpus Christi LNG.

Over the last two years, Sabine Pass has transitioned from a construction site to a production and export facility. To date, Sabine Pass has completed construction on three liquefaction trains, with three more to be completed by 2020.

Corpus Christi has five facilities in the works.

For Cheniere, that equates to about 31.5 million tons per year (mtpa) of LNG export capacity – roughly 9% of the expected global LNG market – by 2020.

About 87% of Cheniere’s agreements are 20-year “take or pay” contracts. That means customers pay for the gas regardless of whether they use the product.

Cheniere’s big advantage over its Australian competitors is the cheap price it pays for natural gas. Right now, U.S. natural gas is about $3.21 per million British thermal units.

Worldwide demand for natural gas continues to rise. According to Cheniere, global demand could increase 30% by 2030.

Last year, LNG trade increased 7.5% to 263.6 mtpa. Industry analysts expect LNG demand to grow to 465 mtpa by 2030.

There are currently 39 countries that import LNG. With the Australian LNG export market about to tighten, Cheniere Energy is in a great position to capitalize.

Good investing,

Dave