Natural gas demand is expected to climb from the two largest importing nations, China and Japan, over the next five years. The production growth and modernisation of China is causing environmental damage, and the government has set targets to triple the amount of energy production coming from natural gas, from 5% to 15%.
Cleaner emissions is the goal, whereas in Japan the fear and concern that nuclear power has generated after the Fukushima disaster is driving natural gas importation. Nuclear power was a large source of electricity, but since 2011 the industry has been widely cut back, so natural gas is the solution to satisfy the country's energy needs.
Natural gas costs are projected to decrease as more supply comes online, and if the US becomes a net exporter of its much cheaper gas, then that can upset the supply-demand equation for prices. Gas is being produced in Western Australia, and Queensland has a number of large LNG projects in development to ship unconventional gas resources from the eastern seaboard. Currently, the Cooper Basin gas region is also increasing shale and coal seam gas production, which will then be sent out through QLD.
Santos (ASX: STO) and AGL (ASX: AGK) have large economies of scale that can help keep their production costs lower, and have the investing power to afford major projects. Santos has just signed an agreement with Origin Energy (ASX: ORG) to share pipeline infrastructure, and deliver gas to the Curtis Island processing and export terminal, eliminating the need and cost of extra pipeline.
Queensland Gas Company, part of the BG Group, is nearing the completion of its $20.4 billion Curtis Island project where coal seam gas delivered to the site from the various pipelines running from South Australia and QLD will be converted into LNG for export.
In the Cooper Basin region, Beach Energy (ASX: BPT) produces the majority of its oil and gas there, and is actively expanding unconventional gas. Drillsearch (ASX: DLS), a $507 million gas and oil producer has been strongly increasing production there also, resulting in an earnings jump up from $9.9 million to $54.3 million in 2013.
Foolish takeaway
Australia is estimated to surpass Qatar, the world's number one natural gas producer, by around 2017. About the same time, the extra demand from Asia will be in full swing, so despite a projected decrease in natural gas prices, the volume of exports will keep earnings up.
Look for the lowest cost producers that are able to fund expansion to keep the growth momentum going. While mining in Australia is going through a cyclical decline, investors can ride the oil and gas story for their own investment return.
