Natural Gas, a Tale of Two Nations

NYMEX (New York Mercantile Exchange) natural gas has been one of the worst-performing commodities this year; it’s down over 16 per cent already, while most commodities are posting year-to-date gains.

The price reached a 10-year low of US$2.336 per million British thermal units (MMbtu) on the 19 January.

Natural gas in the United States has been a simply story of demand-supply fundamentals.

According to the Department of Energy, US production grew by a record 4.5 billion cubic feet per day (BCF/day) in 2011, while demand grew by just 920 million cubic feet per day (MMCF/day).

Relatively new technologies, like fracture stimulation and horizontal drilling, have enabled trailblazing companies and majors alike to unlock massive natural gas reserves and significantly increase production.


Meanwhile, demand has not kept up with supply, despite the price weakness.

About 27 per cent of natural gas demand in the US comes from industry, which has not been doing all that well recently (GFC-related weakness).

Warm winters haven’t helped either; because 51 per cent of total US demand is accounted for by home use and utilities producing electricity.


The result – a gas price freefall.

In Australia, however, it’s quite a different story.

Liquefied Natural Gas (‘LNG’) demand from Asia (primarily China and Japan) has meant that the booming Australian natural gas supply has been met with surging demand.

Japan is heavily dependent upon energy imports and China’s voracious appetite for energy from any variety has meant that Australia has what the US does not – an export market.


But it’s the future that holds the key for Australian natural gas, and for that future we need to look a little closer to home and to the political dynamic.

Australia is dependent upon coal for generating power; around 77 per cent of our power comes from coal and almost all of our ‘base load’ power is coal-fired.

Either through a “big fat carbon tax” or subsidies and incentives, most politicians are saying they want to reduce this dependency to reduce CO2 emissions.

Not many politicians, however, have stopped to consider the possible real alternatives to a fuel source that providing virtually all of Australia’s base load power.

But we have.

Seismic Research considers that natural gas, something that Australia has no shortage of by any means, presents the only alternative to coal for base load power.

The problem is that a lot of the major natural gas projects are export-only and have committed to off-take agreements.

But with every problem there lies an opportunity.

Natural gas in Australia will benefit from an energy boom in Asia, but it will doubly benefit, in our opinion, from domestic environmental policy.

This is definitely a ‘watch this space sector’ that will be providing opportunities in the coming weeks, months and years.

Howard Humphreys
Director & Research Analyst