There’s a gas powerhouse emerging in the Far East. It’s a bet that some of the biggest energy companies are making right now – to the tune of more than $50 billion. And it’s a play that could potentially send your portfolio through the roof in 2010. Here’s everything you need to know…

In Sydney one sunny morning, a group of readers and I met with Kris Sayce, editor of the Australian Small-Cap Investigator. Sayce talked about what could become Australia’s biggest resource boom yet. Australia is on its way to becoming to natural gas what the Middle East is to oil.

Last month, I wrote to you about the liquefied natural gas (LNG) boom, and we picked up a great way to play the growth in LNG spending over the next several years. What follows is another look with new information I gathered while in Australia.

The LNG boom is really an Asia story. (And that makes it an Australian story too, as we’ll see.) As Sayce pointed out, Asia is the fastest growing market for LNG. Sayce presented the chart below, which shows the dramatic increase. (“Non-OECD Asia” excludes Japan and South Korea.)

Currently, Japan is the largest buyer of LNG. Japan and South Korea together make up 53% of current global regasification capacity. (That is, the ability to import LNG and turn it back into a gas for consumer and industrial use.)

Pressed against this new demand is an aging supply base in places. For instance, there are old LNG fields in Malaysia and Indonesia coming to the end of their useful lives.

So how will the market meet this surge in Asian demand? That’s where LNG from nearby Australia comes in. It’s hard to miss this story when you take
a look at the Australian resource markets. It’s in the papers nearly every day. And the amount of money going here is just staggering.

The Gorgon project alone — a joint venture between Exxon Mobil, Chevron and Shell in Australia — will cost some $50 billion. It already has supply contracts from India and China worth $60 billion and will surely get more before it opens in 2014. There are other firms pushing ahead with aggressive LNG ambitions. Woodside Petroleum, an Aussie oil and gas company, wants to be the leader in LNG by 2020.

As a result of all this activity, Australia will challenge Qatar as the world’s largest LNG exporter. One analyst quoted here said: “The numbers are phenomenal. When you look at them it’s mind-boggling. It’s going to be LNG boom times.”

Asian buyers love Australia because it’s closer. It also seems a more secure supply. The gas doesn’t have to pass through the war zones of the Middle East or the pirate-infested waters off Somalia. For most buyers, Australian gas doesn’t even have to pass through the congested Straits of Malacca, either.

Australia has lots of offshore natural gas. Explorers continue to find sizable new discoveries, which means new projects may yet come on board. Most of these are in western Australia’s waters. But Sayce also shared with us the new discoveries made in Queensland, off the east coast. Queensland has big reserves of coal seam gas. This is naturally occurring methane trapped by water deep underground. Coal seam gas also can be converted to LNG.

The big energy companies are already moving in. Shell, BG Group, ConocoPhillips and Malaysia’s Petronas are among those developing projects in Queensland. The growth in LNG production from Queensland alone has tripled in recent years.

With all these projects, it’s quite possible that in the next decade, LNG will surpass coal as Australia’s most valuable export. The government is certainly supporting LNG projects — it will add a gush of tax revenues to its coffers. Look at what oil did for the Middle East; the same kind of thing could well happen for Australia.

I often hear the objection that LNG won’t ever catch on in the U.S. — at least not in a big way and not anytime soon. I don’t disagree, but we have to think beyond just the U.S.

I’ve taken great pains to argue in past articles to you that we have to move away from a U.S.-centric view of the world. We’ve turned an historic corner in recent years. The end result is that non-U.S. markets — or, more broadly, non-Western markets — matter more now than at any time since before the Industrial Revolution. In size, the emerging market economies are on par with the developed world. The pie is split 50/50.

The best way to play LNG, in my view, is to own the companies that put together the Erector Set that LNG needs to operate. There are cold boxes that turn the gas into liquid. There is special insulated pipe. There are storage systems. There is a whole complex of stuff that has to be put together.

By owning one of the companies that make all of that stuff, you don’t take on the enormous risk that goes along with these huge capital projects. I mean $50 billion (the latest estimate) for Gorgon is a gargantuan bet — too big for any single oil company to go it alone, hence the joint venture. And then there is price risk — no one can say what the LNG will sell for or what kind of returns it might generate.

It’s simpler to own the companies that put it all together. They will enjoy fat cash flows and swollen order books for years to come. In the short term, there is worry that some projects may get delayed or cancelled because of the financial crisis. But that’s what gives you the opportunity today. Longer term, the case looks solid to me.

I’m long LNG plays for 2010…

Sincerely,
Chris Mayer

February 12, 2010

Chris Mayer

Chris Mayer is managing editor of the Capital and Crisis and Mayer’s Special Situations newsletters. He also is a contributor to the Daily Reckoning. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas.

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