There is no doubt that the world has energy problem and LNG as an energy is still in its relative infancy. As a result, most investors are unaware of all the details yet. But that’s exactly what is creating an opportunity in the next big trend in energy.
Investors have got to understand three aspects of the booming LNG industry in order to profit from the situation. First is to look at the basics of the industry, like how natural gas is turned into LNG. Second is to understand how natural gas becomes a truly global commodity and the highest bidder will get the gas. Third is to find the bottleneck and who is developing the technology and solutions. The LNG market has been on the verge of a major breakout. It has taken years of infrastructure buildup to lay the foundation for the industry. And with oil companies required to shell out at least $5 billion just to build an LNG plant, they were not ready but however all this is rapidly changing because Exxon Mobil, Merrill Lynch and China National Oil Company have combined to commit $30 billion to investing in new LNG facilities over the next five years. BHP has committed $25 billion for new LNG facilities in Australia. Worldwide, LNG investments are expected to eclipse $100 billion over the next decade. Warren Buffet, Shell, BP and Gazprom are all investing big on LNG. Together, they’re all helping to nurse the LNG industry from infancy to maturity.
The world is slowly paying much higher prices today. The US pays around $11 per million BTU ( MMBTU) Spain pays $13 per MMBTU, Korea and India pay $14 per MMBTU, and Japan pays the highest price of about $15 to $19per MMBTU.
The growth of the LNG industry is already starting to change all that. Japan recently paid $19 per MMBTU of LNG and China and Europe are also paying top dollar for LNG. The price may seem high now, but the long-term LNG contracts these countries are signing will save them a lot more as natural gas prices continue to rise over the long term. There is no transparent market for LNG because it is made up of privately negotiated contracts between suppliers and consumers. That lack of transparency is helping to keep this boom quiet for the time being.
The LNG process is a fairly simple one. The first stage is natural gas production. The natural gas production process for LNG is the same used around the world for more than a century. The second step of the process is liquefaction. This is unique to LNG. Liquefaction is when natural gas is chilled so cold that it turns into liquid form. After it’s turned into a liquid, it can be pumped into the worldwide fleet of LNG tankers and transported around the world.
After transportation, LNG needs to be turned back into gas in a process known as regasification. Performed under highly controlled conditions, regasification allows the LNG to warm slowly. Afterwards, the natural gas produced can be shipped via the pipeline network already in place around the world, whether it’s in Japan, California, Europe or anywhere else.
The LNG process is like a chain with a few different links that have to operate together. But if one of those links isn’t strong enough, the entire industry can be brought to its knees.
LNG infrastructure has been under construction for some time. But the buildup was uncontrolled, and now a huge bottleneck exists. There are currently 40 regasification plants around the world, but there are only 15 liquefaction plants. The supply-demand situation is alarming. Some of these multibillion-dollar facilities are sitting idle while others are running at 15 percent capacity. When you consider the energy giants that built them are sitting on huge losses, it’s no wonder they’re committing billions of dollars to change the situation.
It’s a huge bottleneck for LNG supply that
s going to take $100 billion and years to get fixed. And when that kind of money is flowing in, there’s bound to be an investment opportunity somewhere.
That’s why I believe the bottleneck in liquefaction is the best way to invest in the coming global boom in LNG. All the fundamentals are there and investing in this sector offers far superior returns over the next few years and beyond. Indeed this is a great opportunity for investors who are looking for a long-term fundamental decision.
(Mohammed Habeebulla is a management and investment consultant)
