Australia's development as the main supplier of LNG to Asia in the coming decade will require at least AUD 150bn in investment and drive a major wave of cross-border dealmaking and funding innovation, according to analysts and investment bankers. The LNG industry, which Resources Minister Martin Ferguson has said will transform Australia into an "energy superpower," will involve not only energy majors such as Chevron, Shell, Exxon and Australia's Woodside, but Asian utilities, junior explorers, infrastructure providers and service companies. Funding the unprecedented level of investment required will also place demands on the expertise of the legal and finance industry, from the dealmaking and capital raising skills of investment bankers to the ingenuity of those creating structured products such as hybrid securities. The Australian Petroleum Production and Exploration Association has forecast that LNG production will more than double from 20 million tonnes a year to at least 50 million tonnes by 2017. An estimated AUD 10bn to AUD 25bn is expected to be invested in Western Australia's LNG sector, the industry's heartland, each year for the next five years. Achieving that level of production, driven by Asian growth and LNG's status as a cleaner burning fuel, will see the development of new greenfield projects in the already established Western Australian fields and also the Northern Territory and Queensland's Surat Basin, off the coast of the town of Gladstone, which is expected to begin producing in 2013. Producers are desperate to be able to fill a forecast shortage of LNG in 2014. While the top tier of the world energy industry is involved at the production level, many of the other producers and explorers are less well known but may be more likely to be involved in deals in the short and medium term. Karoon Gas, for example, listed on the Australian Stock Exchange in June 2004 now has a market capitalization of around AUD 1.4 bn, largely on the strength of its stake in exploration permits in the Browse Basin off Western Australia. AUD 1, 000 invested in Karoon a year ago would be worth more than AUD 3,500 today. Another new player is Bow Energy, which has stakes in four coal seam gas projects. The company said in October that it hopes to clinch an offtake deal by mid-2010 and has had negotiations on the possible sale of an equity stake. Arrow Energy, which is developing coal seam gas acreage in the Surat Basin, was the subject of takeover speculation in the Australian press in November. The chairman of major shareholder Washington H Soul Pattinson suggested the company was looking for a buyer for its 17% Arrow stake. "Many of these junior companies don't have the money to be able to support the funding of a development so they would probably look to sell the entirety of their stake or do some third party gas deal," said David Wall, resources analyst with Perth based equities firm Hartleys. "There's also a massive exploration push involving smaller companies such as Methanol Australia, Moby, Cue, Tap, Roc and Oilex, and all those companies have drilling next year which could prove up gas." There is already an established pattern to the development of LNG projects, Wall said. Companies "prove up" their discovery and then sell some equity to a larger producer if they need to but also to an offtake partner, typically a utility which needs to limit its own risk. Most, but not all, of these utilities are from Japan, South Korea or China. France's GDF, for example, took 60% of a project from mid-sized local producer Santos in August. In another recent deal, Japan's Chubu Electric took a 0.417% stake in the Gorgon project in late November. "It makes sense for the offtake partners to be involved in both the upstream and downstream sides of the business because this is a long term relationship and it is logical for both parties to be dependent in a closer fashion," analyst David Wall said. Wall sees LNG infrastructure as another area of dealmaking, particularly for the coal seam gas players. "If you have three companies all trying to get their gas ready for a train it will potentially take them several years longer to provide all the gas themselves but if they go thirds they can defray risk and get the product to market quicker," he says. Service companies such as Mermaid Marine, Decmil, Clough, Thiess and Downer EDI are also likely winners from the LNG industry's development. When the Gorgon project was greenlighted, service company WorleyParsons won an AUD 2bn contract. A delegation representing 16 UK services firms under the umbrella of the UK Energy Industries Council visited Darwin in late November looking for joint venture partnerships. The final piece in LNG industry development is funding, and the industry has an appetite that will test world debt markets. Philip Graham, at Citi investment bank in Sydney, said that "as a general rule of thumb" 40% of the funding will come from Export-Import banks, but the rest will have to come from other sources. "The big issue here is that you'll max out the Exim banks and to finance the rest of the project you have the issue of project finance or structured finance," he said. "There's also the bank debt market and bond financing, but you need investment grade ratings and the size of the domestic market in Australia is probably only a couple of billion dollars at best." Raising the funds, he said, is another aspect of the LNG industry that should make for more dealmaking activity over the next decade.
April 29, 2010, Grand Hyatt Sao Paulo, Brazil