The Daily Update - Aramco is Stepping on the Gas

For some time, Aramco has openly been looking to tap the flourishing global natural gas business and 2019 may be the year we see the world's biggest oil exporter make sizable investments tying it with the fast expanding gas industries in the US, Russia and perhaps Australia. Yesterday their CEO Amin Nasser announced aspirations to boost production from 14 billion to 23 billion cubic feet of gas per day by 2030, investing as much as $150 billion in domestic projects and foreign acquisitions in what they see as a “very lucrative” opportunity.

Although competition in the global LNG market has burgeoned in recent years, demand is expected to keep up as countries transition to less polluting energies alongside general growth in global energy demands. The world on average spends over 10% of GDP on energy consumption; oil and coal each still comprise well over 30% of that, with natural gas currently around 22% of total energy supply. Renewables however still only account for little more than 10% of total global energy supply, and even if optimistic goals are attained - of quadrupling this sector over the next few decades – growing global energy demands will continue to obstinately depend primarily on fossil fuels. And although in Europe renewables have made up the lion’s share of new energy projects and production (~90%) that has not been the case elsewhere; the sidestepping into natural gas has been a more universal trend, with gas a much more realistic contender for becoming the world’s (less polluting) primary energy source, perhaps surpassing coal within a decade.

Aramco has more often than not seen natural gas as a side industry since the mid-1970s with its modest output chiefly channelled to domestic demand and feedstock for refineries. But now it is not the only oil major to look to “diversify” more ambitiously into natural gas. Plenty of other oil giants like Shell are positioning themselves as “International Gas Companies” as they look to the future of the industry and their growth market (not forgetting that even all those electric cars hitting the road will be increasingly fuelled by natural gas given that growing electricity consumption across the world will account for half of the future natural gas demand).

Qatar has been the key player in LNG exports now for over 20 years primarily through the Dolphin pipelines across the Middle East and Nakilat with its largest fleet of LNG tankers in the world exporting predominantly to Japan, Korea, India as well as to Europe. But more recently heavy investment in Australia led them to overtake Qatar as the largest LNG exporter in recent months. Moreover, the explosion of the shale industry in the US has driven investment in exporting excess natural gas, such that they will soon have tripled their LNG export capacity to supply 25% of the global market. Aramco is already partnered with Motiva, the largest refinery in the US, and plans to invest a further $10 billion. They are also in talks to be a major partner in a Russian Arctic LNG project with Novatek.

Natural gas is still somewhat of a regional market with rates more closely related to supply and demand across the Atlantic with Henry Hub, whereas prices are broadly oil-linked across Asia. Although this will change with the growth in shipping LNG, prices for contracts in Asia can still be around double what they are in the US (having been as high as 5/6X in the past). Given the proximity to China, the accelerating Australian LNG industry investment here will also remain an attractive proposition for Aramco. Of the around 50 nations that import LNG, China is the most notable energy-hungry natural gas importer. Although Japan and South Korea have been the dominant importers for years, China overtook South Korea in 2017 and surpassed Japan for the first time last year to become the largest natural gas importer (after a 33% yoy rise vs a 17% fall in Japan following their restarting of nuclear plants). China’s “dash to gas” should see it account for 10% of domestic energy needs by the end of this year, with plenty of scope to grow further if the typical 25% proportion of natural gas across the developed world is anything to go by.

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