LNG is a game of snakes and ladders

The plunge in oil prices in the last few months predictably brought out the Chicken Littles, writes columnist Malcolm Baxter

The plunge in oil prices in the last few months predictably brought out the Chicken Littles, all running around and squacking “The sky is falling, the sky is falling.”

And nowhere was that more apparent than when it came to LNG.

I read a story that even went so far as to pronounce it was the “death knell” of any liquefied natural industry in B.C.

That is of course nonsense.

Let’s deal with oil first.

This dive in oil prices we have seen in the last few months is hardly anything new.

In January of 2005, the price of a barrel of Brent oil – the global bench mark – was a touch under $50.

By May of 2008, it had rocketed to $140/barrel.

Four months later, it had crashed to under $50 again.

But soon started a climb that took it to $130/barrel by May of 2011.

Then crashed again over the last half of last year.

The world as we know it did not end in either of those two earlier low points and it will not this time either – as I write this, Brent oil appears to have stabilized at $57, above the last “crash” level.

Now let’s shift focus to liquefied natural gas.

True, LNG prices have predictably dived in the last six months in lock step with those of oil. Also true is that means Asian countries who bought into multi-year contracts tied to the price of oil are at this moment getting their LNG for a lot less than they were paying even six months ago.

But they knew full well that this is a game of snakes and ladders so while the snakes are winning at this point, the ladders will soon take over.

And that’s the whole point of long-term contracts, to smooth out the bumps.

Which takes us to Woodside, the company that just bought out Apache’s Australian LNG holdings and its half share in the proposed Kitimat LNG project for an estimated $3.75 billion.

These guys are no amateurs or speculators.

While we may have never heard of them before, they are the number one energy producer Down Under.

And they have about $2.5 billion free cash available, emphasizing they are no fools.

So the purchase inevitably leads to the conclusion that they are convinced the price of oil will rebound at some point in the future to a level that makes KLNG viable over the long term, 30 or 40 years usually.

Will that translate into a green light for the project this year?

I am not convinced of that but I am convinced having Woodside involved in the project is a big plus.

FOOTNOTE: The main factor in the decline of oil prices is a simple question of supply and demand. As in while demand eased over the last half of last year, supply went significantly in the opposite direction thanks to the leap in shale oil poduction in the United States.

So how does the market get back into balance? Easy, say the Americans, the Persian Gulf producers, primarily Saudia Arabia, should cut their production to articially force prices back up.

The Saudi reaction was thanks, but no thanks, we are going to continue producing at our current level, the attitude being why should we have to correct a problem that was created by the US?

And they can afford to be hard-nosed about this because of the billions upon billions of dollars they have put into a rainy day account.

Retired Kitimat Northern Sentinel editor Malcolm Baxter now lives in Terrace and can be reached at msdbax@citywest.ca.

 

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