A bad case of gas

Jim Rogers, the long time commodity bull, noted that chasing commodities and chasing commodity companies are two entirely different things; chalk and cheese.

As reported in Got the shaft, Rogers gave this example:

How does investing in commodities compare with stock investing in terms of the average investor?

Jim Rogers: It couldn't get any simpler. And if you start looking into commodities, you'll see that commodities are a lot simpler and easier to analyze than stocks.
For instance, natural gas is pretty dumb stuff. If there's too much gas, it's going to go down. If there's too little, it's going to go up.

Natural gas doesn't know who Alan Greenspan is, or care; it just cares about supply-and-demand. And once you've made that analysis, it's a lot easier to buy and sell natural gas than to start analyzing 300 natural gas companies around the world, where you have to worry about management and balance sheets and stock markets and unions and environmentalists and dozens of other things.

And you believe commodities can be less risky than stocks, too?

Jim Rogers: Well, Enron was a natural gas company. Enron went to zero. Natural gas can never go to zero. It can go down, obviously, but it can never go to zero.

The situation involving Australia's export of gas from its Northwest Shelf project to China is exactly the kind of thing Rogers was on about. You can have a great commodity and manage yourself out of its benefits, as Sons of Gwalia did with gold.

The Australian Financial Review is reporting that Australia may have dudded itself out of $20 BILLION dollars in its contract arrangements with CNOOC.

A landmark gas contract with China stands to cost Australia's biggest natural resources project up to $20billion in lost sales due to contractual terms that fail to account for the increase in oil prices to record levels.

Ahead of tomorrow's arrival in Australia of Chinese Premier Wen Jiabao, it has been revealed that a 25-year gas contract between the China National Offshore Oil Company and the North West Shelf Venture was struck at prices that are half those enjoyed by project operator Woodside Petroleum on other major contracts.

The 2002 liquefied natural gas (LNG) contract, hailed at the time by Prime Minister John Howard as Australia's biggest energy deal, does not contain clauses allowing the six North-West Shelf partners to alter prices in line with changes in the oil price, potentially costing $3.5 billion in lost revenue over the next six years alone.

The Australian Financial Review understands the contract locked in the price of Australian LNG against an oil price at the low end of the LNG price cycle of about $US20 a barrel. This has been confirmed by the Chinese buyers.

"We paid [a price equivalent to] about $US20 per barrel for the first phase of the Guangdong LNG terminal. The price will stay unchanged for 25 years, with annual imports of 3.7 million tonnes," CNOOC chief executive Fu Chengyu said.

This means the contract is capped at an oil price significantly lower than the current oil price of about $US60 a barrel. This would equate to lost revenues of $3.5 billion over the next six years and potentially $20 billion over the next 25 years if the LNG market prices remain high.

Details of the price of the contract have not been released by the North-West Shelf partners, but analysts have now been able to piece together just where the LNG was priced.

The partners include Woodside, Shell, BP, BHP Billiton, Chevron and MiMi, a partnership between Japan's Mitsui and Mitsubishi Corporations.

This is now half the price at which the vast bulk of Woodside's LNG contracts are trading. And they are the contracts that were negotiated in the 1980s and 1990s. Woodside in the fourth quarter of last year enjoyed an average LNG price of $US320 a tonne.

The pricing structure of the Chinese contract was significantly inferior to that of the pricing structure of the Japanese and Korean contracts of the late 1980s and 1990s. Unlike the Chinese deal, these contracts enabled some participation in a rising oil market.

The 2002 deal compares miserably with another LNG agreement around the same time to supply China with 2.6 million tonnes of LNG annually from 2008 from the BP-led Tangguh field in Indonesia The Chinese have renegotiated the terms of that deal, but have not offered to renegotiate the North-West Shelf deal. Industry sources said the oil price ceiling of the Tangguh contract, at which the related LNG price was capped, had recently been raised from $US25 a barrel to between $US40 and $US45 a barrel, more than double that of the Australian deal.

This deal measured against the average of Woodside Petroleum's other, mainly Japanese, contracts will leave at least $3.5 billion on the table for deliveries over the next six years.

A spokesman for the North-West Shelf joint-venture partners said there were strong non-price benefits of the LNG deal, including securing Australia's place as the first shipper of LNG to China, potentially the fastest-growing LNG market in the world.

"Having a relationship with China is of much greater benefit than the alternative. There is significant upside for first movers," the spokesman said.

But the gas exporters are not crying over spilled milk, not in this heady commodity market, anyway. The AFR is also reporting about the great export opportunities for gas that are opening up with Indonesia:

Woodside Petroleum and Chevron Corp might be best placed among LNG companies in Australia to benefit from surging demand for the fuel as Indonesia faced difficulty in meeting supply contracts, a consultant said.

Woodside's $5 billion Pluto liquefied natural gas project and Chevron's Gorgon venture were likely to be the next projects to start up, said Frank Harris, co-head of global LNG at Edinburgh-based Wood Mackenzie Consultants. Inpex and ConocoPhillips also might capitalise on increased demand for Australian LNG, he said.

"Australia has to be the beneficiary of the situation in Indonesia," Mr Harris said. "Australia is perceived as a blue-chip supplier with huge reserves upside, while all its key competitors in the Pacific basin supply business have got some sort of issue."

Malaysia might have difficulty supplying high-quality gas to its LNG plant, while Qatar had a moratorium on additional gas exports and Iran looks increasingly uncertain as a future LNG supplier, Mr Harris said.

Australia has about eight potential new LNG projects or expansions, in addition to an expansion underway at the Woodside-operated North-West Shelf venture, the country's biggest LNG project. ConocoPhillips this quarter started up the nation's second LNG project, in Darwin.

The federal government said this month it planned to work with the nation's $17billion oil and gas industry to almost quadruple LNG exports to more than 50million tonnes a year within a decade.