The rapid development of oil and natural-gas reserves trapped in shale and other “tight” reservoir rocks has catalyzed dramatic changes in the US energy picture over the past three to four years. Not only did frenzied drilling in unconventional plays enable the US to supersede Russia as the world’s leading producer of natural gas in 2010, but stepped-up drilling in liquids-rich plays has also transformed the domestic petrochemicals industry and increased the country’s annual oil output for the first time in 18 years.

But investors shouldn’t ignore the concurrent revolution that has occurred in Australia’s natural-gas industry over the past decade. Australia was one of the few developed economies that didn’t lapse into recession in the wake of the 2008-09 global credit crunch and economic slowdown. The secret to this resilience: Australia’s abundance of in-demand natural resources–from thermal and metallurgical to iron ore and copper–and proximity to China, India and other rapidly growing emerging markets.

Although Australia’s estimated 2.9 trillion cubic meters (Tcm) of proven natural gas reserves represented only 1.6 percent of the world’s resource base at the end of 2010 (BP Statistical Review of World Energy 2011), the nation’s production of natural gas and exports of liquefied natural gas (LNG) have increased steadily over the past decade.

Source: Australian Bureau of Agricultural and Resource Economics

This uptick in gas production pales in comparison to the turnaround that has occurred in the US. Nevertheless, independent producers and major integrated energy companies expect to benefit from rising demand for natural gas in China, India and other emerging markets.

The Chinese government’s long-term plans call for natural gas to account for 10 percent of the country’s energy mix, one-third of which will be imported via pipelines or LNG.

Natural gas has been growing in popularity in China, particularly in power-generation facilities located near major cities. Concerns about air quality mean that many of the high-rise residences constructed during China’s recent housing boom are equipped for piped gas. Further migration to urban areas will only increase demand. China Gas Holdings, a natural gas distributor, recently reported that it expects its annual sales volume to surge to 10 billion cubic meters (Bcm) per day in 2015 from 5.2 Bcm per day in 2010.

LNG imports will be part of the solution. China’s first re-gasification terminal opened in 2006, and the country currently boasts three operational import facilities, all of which are operated by China National Offshore Oil Corp (CNOOC). The first phase of the pilot Guangdong LNG terminal, which came onstream in September 2006, boasts a total capacity of about 180 billion cubic feet (Bcf) of gas per day, while the Fujian re-gasification terminal that began operations in May 2009 sports an initial capacity of 126 Bcf of gas per day. The company also runs the Shanghai LNG terminal, which can re-gasify 146 Bcf of gas per day.

But that capacity is slated to expand substantially. By 2015, CNOOC should have five LNG import terminals up and running, while PetroChina (Hong Kong: 0857, NYSE: PTR) will have four operational re-gasification facilities and China Petroleum & Chemical Corp (Hong Kong: 0386, NYSE: SNP) will have two. Check out this list of China’s proposed, under construction and operational LNG import terminals.

Source: Reuters

And investors shouldn’t overlook India’s insatiable appetite for energy commodities.

India’s Ministry of Petroleum and Natural Gas expects LNG imports to increase from 33 million cubic meters (mcm) per day to 162 mcm per day by fiscal year 2029-30. Over this period the government expects natural gas to grow to 20 percent of India’s energy mix from 9 percent. LNG imports could easily exceed estimates if expected pipeline imports don’t materialize–a distinct possibility–or domestic production falls short of expectations.

Two LNG terminals currently operate in India, Petronet LNG’s (Bombay: 532522) 10 million tons per annum (mtpa) facility at Dahej and Royal Dutch Shell’s (LSE: RDSA, NYSE: RDS.A) 3.6 mtpa installation at Hazira. Petronet LNG plans to add 2.5 mtpa of additional capacity. Ratnagiri Gas and Power’s 5 mtpa plant in Dabhol remains under construction, though 1mtpa of capacity could come online before the project is completed. Two additional LNG import terminals are in the early stages of planning.

Meanwhile, growing demand for LNG in emerging markets supports higher gas prices in developed economies. In 2010 Japan and South Korea together accounted for 64 percent of the world’s LNG imports, and utilities in both nations have proved eager to ink deals securing long-term supplies of this critical resource.

Australia’s domestic demand for natural gas should also increase substantially in coming years, as utilities seek to reduce carbon dioxide emissions to comply with new environmental regulations. At the same time, the dramatic expansion of mining and industrial facilities in Western Australia will also drive demand for additional electricity. The majority of these power plants will be fired by natural gas. In 2010 natural gas accounted for only 14 percent of Australia’s electricity generation, compared to about 24 percent in the US.

European demand for LNG should also increase over the coming years, particularly after Germany’s recent decision to temporarily shutter seven of its nuclear reactors and to accelerate plans to phase out its nuclear power plants.

Against this backdrop, the energy sector’s massive investment in expanding Australia’s liquefaction capacity makes sense. This map and table list the country’s proposed, under construction and operational facilities to liquefy natural gas for export.


Source: California Energy Commission

Source: Bloomberg, Company Reports

Geoscience Australia and the Australian Bureau of Agricultural and Resource Economics estimate that 92 percent of the nation’s natural gas reserves are located offshore Western Australia and the Northern Territory in the Bonaparte, Browse and Carnarvon basins. Of these three gas-rich areas, the Carnarvon has undergone the most exploration and development. Not surprisingly, the preponderance of Australia’s LNG projects will source their feedstock from these fields.

But the discovery and development of unconventional gas reserves in the eastern portion of Australia have prompted energy companies to pursue four separate liquefaction facilities on the Queensland coast: BG Group’s (LSE: BG, OTC: BRGYY) Queensland-Curtis LNG Project, Santos’ (ASX: STO, OTC: SSLTY) Gladstone LNG Project, ConocoPhillips’ (NYSE: COP) Australia Pacific LNG Project, and Royal Dutch Shell and PetroChina’s Arrow LNG Project.

Although the Surat basin in this region is home to substantial conventional resources, much of the feedstock for these LNG projects will come from Queensland’s prolific coal-seam gas (CSG) plays. CSG is methane that has been trapped in coal deposits by water. Producers liberate the gas by drilling wells into the coal seam–usually to a depth of 300 to 800 meters–and pumping out the water.

Australia first began exploiting CSG on a commercial basis in 1996 in the Bowen Basin, and the rapid development of these plays has enabled Queensland to grow its natural gas production considerably in recent years. According to the Australian Petroleum Production & Exploration Association, CSG output more than doubled over the past three years to 215,216 million cubic feet (Mcf) from 102,733 Mcf in 2007. In 2010 Queensland’s share of Australian natural gas production increased to 14 percent, largely because of CSG development.

Source: Australian Petroleum Production & Exploration Association

Several producers also plan to drill their first shale gas wells in coming months to further augment their reserves.

In the fourth quarter, Santos will sink a vertical well in the Cooper basin’s shale formation. Fracturing is slated for the first quarter of 2012. A year later, the Santos will drill a horizontal well that’s 1,500 feet long and includes 20 to 30 fracturing stages. Beach Energy (ASX: BPT) has also scheduled a pilot shale gas drilling program in the Cooper Basin. These efforts will get under way in 2013.

How can you profit from Australia’s LNG boom? We prefer LNG tanker companies that stand to benefit over the long term from the expanding global LNG trade. Investors should also consider some of the smaller exploration and production firms operating in Queensland and New South Wales. Arrow Energy, jointly owned by Royal Dutch Shell and PetroChina, earlier this month acquired Queensland-based CSG producer Bow Energy for AUD535 million, a roughly 72 percent premium. Santos, Australia’s third-largest oil and gas producer, in July paid AUD730 million to buy the outstanding shares of Eastern Star Gas that it didn’t already own. More deals could be in the offing.

To learn more about other investment opportunities Down Under, sign up for a risk-free trial of David Dittman and Roger Conrad’s recently launched Australian Edge newsletter. The must-read October issue spotlights the duo’s favorite Australian copper, iron-ore and coal producers.

Don’t miss out on this unique opportunity to hear Elliott Gue, Roger Conrad, Yiannis Mostrous, Benjamin Shepherd, David Dittman and Jim Fink share their latest insights on the markets and economy. Join these investing experts at Investing Daily’s 2012 Wealth Summit at the luxurious Four Seasons Hotel in Palm Beach, FL on May 4-5, 2012.

With the US economy likely to grow at a lackluster pace over the next few years, expect the stock market to suffer through a period of extreme volatility as investors adjust to the new normal. The EU’s ongoing sovereign-debt crisis will also continue to enervate investors. Throw in “Black Swan” events such as the civil war in Libya, and it’s easy to see why investors are on edge. A fearmongering media that focuses on worst-case scenarios rather than the likely outcomes doesn’t help matters.

But Investing Daily’s 2011 Wealth Summit will give you the edge in these uncertain times. This year’s event will focus on winning investment strategies that generate profits in both up and down markets. To learn more about this must-attend Wealth Summit, go to InvestingSummit.com or call 1-800-832-2330 for more details.

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