The long touted rise in domestic natural gas prices has begun. According to research firm Wood Mackenzie, wholesale prices for natural gas have risen from an average of between $3 – $4 per million British thermal units, to more than twice that as domestic supply contracts expire and come up for renewal.
Analysts anticipate a huge increase in natural gas production over the next four years as some of the biggest energy projects Australia has ever seen come online. However, Bloomberg reports that the majority of the production, 81% in fact, will be exported offshore by 2018 – up from 53% in 2012.
Unlike some counties which have placed legal limits on the amount of natural gas that can be exported, such as Israel, Australia has virtually unrestricted export ability, which due to strong international demand has meant only limited volumes remain for domestic demand.
Origin Energy Limited (ASX: ORG) says part of the problem is that regulation, like the New South Wales ban on coal-bed gas exploration within 2km of residential areas, reduces access to some potential gas reserves.
The rising prices should result in big increases in sales revenue for many of Australia's existing as well as up and coming gas producers. Santos Limited (ASX: STO) along with project partner Oil Search Limited (ASX: OSH) are forecasting significant increases in revenues, from as early as this year on the completion of the PNG LNG project.
Production from the project is set to be exported to buyers outside Australia, but Santos is also expecting to take advantage of higher prices domestically with its exposure in the rejuvenated Cooper Basin region, where it owns 66% of the Moomba processing plant.
Companies including Beach Petroleum Limited (ASX: BPT) and Drillsearch Energy Limited (ASX: DLS), have invested hundreds of millions in the Cooper Basin over the last five years, where 3D seismic technology and hydraulic fracturing (fracking) are driving new oil and gas discoveries.
Foolish takeaway
The rising prices, combined with higher production will see many producers achieve large increases in cash flow in the next 12 months. For investors this will likely mean some companies, including Santos, raise dividend payments and distribute more of the spare cash to investors.
