LNG in 2009


By Dan Denning • January 12th, 2009 • Related Articles • Filed Under

About the Author
DanDan Denning is the author of 2005’s best-selling The Bull Hunter (John Wiley & Sons). A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia and pens the small cap newsletter, The Australian Small Cap Investigator. He is also a contributing editor to the Australian resource investing publication Diggers & Drillers.

Last week, the action of the Bank of England to cut interest rates to a 314-year low inspired us to go back at look at the origins of the Central Bank itself. Why did the BoE survive when the South Sea Company did not? Was there some Darwinian advantage the BoE had the made it uniquely fit for the purpose of perpetually funding British government deficits?

The answer to that question will have to wait a few days. While we were prepared to launch into the history of British land banks (or banks capitalised land) reality intruded over the weekend. And while arable farmland may be one of the scarcest resources (and best investments) of the next twenty years, it’s getting awfully cold in Europe. Which is bad news if you depend on Russian gas.

Yes energy, too, is its own kind of capital. Vladimir Putin is reminding everyone of that again. Earlier this weekend, Putin’s man in the Kremlin Dmitry Medvedev nullified a three-way deal signed on Saturday that would have resumed shipments of Russian natural gas to Eastern Europe via Ukrainian pipelines.

Russia supplies Europe with 25% of its natural gas, and 80% of that gets to Europe via Ukrainian pipelines. The Russians say the gas is being siphoned off illegally and then sold at a higher price. Maybe it is. Maybe it isn’t. Who knows?

The real issue is control of the energy resource and the network for transporting it. One is no good without the other. Both are critical, and happened to be owned by competing interests. If you’re at the tail end of a long energy logistics network (like, say, the UK), you’ve got troubles.

But then, there are plenty of troubles to go around. In the U.S., oil service stalwarts Schlumberger and Halliburton are laying off skilled and experienced workers. The falling oil price is setting up an oil trap. It’s leading to less drilling and exploration. That’s going to lead to more scarcity. And THAT’s going to lead to higher oil prices.

“It’s not like Schlumberger & Halliburton don’t know this,” explains are friend Byron King back in Pittsburgh.” So would they be laying off people if their forecasts were sunny for the coming months, or the next year or two? No. If things looked like they were picking up, they’d keep the people so they have enough work force to do the work. They’re laying off because they see a significant period of slow business. Which if you’re SLB or HAL, means less well-drilling. And that’s bad for US energy output. Fewer wells means eventually less output, which means scarcity and higher prices.

“And while we’re talking about ‘old’ things, much of the existing energy infrastructure is old. The Alaska Pipeline, for example, was completed in 1977 from steel pipe that was rolled in 1969 and 1970. Most of the US pipeline system — for example, the main trunk lines that carry natural gas from the Gulf Coast to the Mid-Atlantic & Northeast states — is older than that. The Colonial Pipeline was built in the early 1960s. Many other lines (Texas-Eastern comes to mind) were constructed in the 1930s and 1940s. How long until the steel rusts away? These are not the Roman aqueducts, that will last for 2,000 years or something.”

No. Byron is right. They just don’t make them like they used to.

Yet it would be negligent to suggest all the news from the energy patch is bad. Kris Sayce, our colleague over at Money Morning and the editor of the Australian Small Cap Investigator, has begun 2009 better than a New South Welshman opening up the batting for Australia’s 20-20 cricket team. For you non-cricket fans out there, that means Kris has two energy-related share tips that are each up over 100% from the price he tipped them at.

That is stunning stuff, given how wretched the market’s been in the last-four months. But as Kris pointed out in his latest weekly e-mail update, even when the big indexes are caught in a trading-range, the real story is in the specific companies. For small-cap punters, range-bound markets are just fine-provided you find the sectors and firms that are bucking the trend.

And what would those sectors be? How about LNG? While Schlumberger and Halliburton are swinging the axe in Houston, Santos is hiring workers in Gladstone. Bloomberg reports that Santos is recruiting nearly 600 workers for its $7.7 billion liquefied natural gas project in Queensland.

LNG is one the big stories of 2009. Fortunately, Kris got on the story in 2008 and is reaping the benefits already. And though Australia doesn’t have a great deal of oil, it does have plenty of thermal coal, coal-seam-methane, LNG, and, of course, uranium.

In other words, there are plenty of energy stories to invest it. And in a world where energy, too, is capital, that’s good news for investors.

Dan Denning
for The Daily Reckoning Australia



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