Energy giants tipped to gain as Asia’s LNG demand heats up
Australia’s big natural gas exporters are poised to cash in on the strong demand across northern Asia that has propelled the prices of the fossil fuel out of their COVID slump.
After last year’s coronavirus lockdowns sent liquefied natural gas (LNG) prices plunging below $US2 per million British thermal units, cargoes for delivery in Asia have climbed back above $US13, the highest for this time of the year since 2013.
Analysts say gas markets have been rallying after a colder and longer Northern Hemisphere winter increased demand for heating and drained stockpiles, while Asia’s accelerating economic recovery and easing of travel restrictions support higher energy consumption.
“Gas demand growth in Asia has emerged faster than anticipated and low storage levels in Europe should also support higher LNG prices in the near term,” UBS energy and utilities analyst Tom Allen said.
“We expect higher realised prices to translate to higher revenues for Australian energy names.”
UBS has raised its price target for ASX-listed oil and gas producers Santos and Oil Search by up to 2 per cent to reflect higher LNG spot prices in a tightening market. Spot prices in Asia averaged $US9.6 per million British thermal units during the second quarter of 2021, Mr Allen said, almost four times higher than the same time last year and 6 per cent higher than the previous quarter.
However, the bank has lowered its target for Woodside by 1 per cent as it believes higher spot prices will be offset by expected capital expenditure increases at Woodside and BHP’s $15 billion Scarborough LNG joint venture off the coast of Western Australia.
A prolonged rise in international prices could spell more pain for domestic gas buyers in Australia where supply contracts are linked to LNG benchmarks. Industrial businesses like manufacturers that rely on gas for energy and as a feedstock have suffered steep price rises in recent years and recently lost an appeal made to the competition regulator to change how it calculates east-coast pricing to exclude costs associated with LNG production.
“Conditions are already tight for many domestic gas users who are still reeling from a three-fold increase in gas prices,” the Energy Users Association of Australia’s Andrew Richards said. “They are looking for the ACCC to help level the playing field, but this decision seems to reinforce the status quo.”
LNG is one of the nation’s largest export commodities, accounting for $32 billion in export revenue in the past financial year. The federal government expects this to increase sharply in the coming 12 months to $49 billion.
However, oil and gas companies are also facing escalating pressure on climate change and the prospect of demand for their commodities falling faster and steeper in the future than previously expected. While natural gas is helping to reduce emissions in parts of the world by displacing coal-fired power, the International Energy Agency recently released a landmark report in May that warned investors must avoid funding any new oil and gas fields for the world to achieve the Paris accord’s aspirational goal of limiting global temperature rises to 1.5 degrees.
The Climate Action 100+ coalition backed by 575 institutional investors last month described the fresh forecasts around the speed of emissions cuts required to slow global warming as a “game changer”.
“We engage with companies right across all sectors of the Australian economy .. and 90 per cent of the questions we are getting at the moment on climate are about oil and gas companies,” Climate Action 100+ director for Australia Laura Hillis said. “This is a really topical issue.”
Industry leaders in Australia say they recognise society’s accelerating climate demands and the risk of being shunned by equity investors and lenders without strong climate commitments. Still, they have voiced confidence in robust future demand underpinning new growth projects in Australia, as large Asian customers continue turning to LNG for a reliable and comparatively less-emitting energy source.