Has the LNG share price caught your eye as an investor? Be careful! The international gas market is notoriously volatile.1 For a strong investment for the future, renewable energy is a safer bet.2

What is LNG?

The gas industry chills natural gas to a liquid state to create liquefied natural gas (LNG). This makes it easier to store and transport for export. Many countries do not have pipelines to import natural gas. Therefore, gas exporters transport LNG to them on large ships. This is particularly the case in Asia.3 Unfortunately, this process increases the chance of gas leaks. Consequently, we can’t consider LNG to be a clean fuel.4

Natural gas is composed nearly entirely of methane.5 Methane is a potent greenhouse gas.6 There is over 230 times more CO2 in the atmosphere than methane. However, methane traps up to 86 times more heat over 20 years. It traps 34 times more over a century.7

The fossil fuel industry underestimates its methane emissions by 25 to 40 per cent globally.8 Also, the way Australia measures its methane emissions is outdated. So, the Australian natural gas industry probably releases more methane than records show too.9

What is the LNG share price?

The share price of Australian LNG producers rose in early 2021. This related to a sharp increase in LNG prices in the Asian market.10 However, in 2020, Australian gas producers had a tough year. For example, the share price of Woodside Petroleum dropped dramatically. Woodside is Australia’s largest natural gas producer.11

The LNG market is volatile

The price of LNG crashed in early 2020. This was due to the worldwide economic downturn related to COVID-19. Demand for LNG also fell. Even before the pandemic, there was too much LNG supply, according to McKinsey. This market volatility caused LNG company profits to decline in 2020, says the consulting firm.12 Fast-forward to early 2021. Demand rose quickly due to cold weather. Gas exporters couldn’t meet this demand fast enough. As a result, LNG prices jumped to record highs in Asia.13

This quick price turnaround is not as strange as it seems. Natural gas is an inherently volatile commodity, suggests Bruce Robertson of the Institute for Energy Economics and Financial Analysis (IEEFA). Low gas prices caused financial instability in the industry. Therefore, gas companies reduced drilling and investment. IEEFA says this was a factor in the LNG price spike. It expects more market volatility in the future.14

Australia’s LNG companies

In the Australian stock exchange (ASX), 147 companies are listed under the energy sector15 with Woodside Petroleum (WPL), Santos (STO) & Oil Search (OSH) occupying the top three spaces of the market share. A look at the net profit, losses and operations of some of Australia’s companies shines a light on the volatility of LNG.

Liquefied Natural Gas Ltd (LNGL)

LNGL was officially removed from the ASX on February 26th, 2021 after a -62.61% performance decrease on the previous year and a -85.68% performance decrease in their (energy) sector at the price of $0.04316. Gregory Matthew Vesey, the executive chairman who rose from Chief Executive Officer (CEO), oversaw the notification of DOCA termination.

Bear Head LNG project

This was a project where an LNG terminal was due to be completed in Nova Scotia in Canada. However, this didn’t materialise due to the collapse of LNGL. LNGL and its Managing Director were responsible for this terminal. However, increasing financial problems led to the company requiring administrators to review the company, which was the first major step to its closure and directors resigning.

What is the future outlook of the LNG share price?

Gas still faces “significant uncertainty”, according to the International Energy Agency (IEA).17 As outlined above, uncertainty in the international gas market directly affects the share price of LNG companies.

The IEA forecasts a 30 per cent total increase in global gas consumption by 2040. Demand will come mainly from Asia, says the agency. These countries will buy the cheap gas that results from the oversupplied market.18 It is true that smaller economies in Asia have started to import gas as a source of power. However, the sharp rise in LNG prices in 2021 already forced companies in Pakistan and Bangladesh to cancel some import contracts. This price volatility could lead to reduced demand in these emerging economies, according to the IEEFA.19

The institute also suggests that unaffordable LNG prices could threaten gas projects in Vietnam, Pakistan and Bangladesh. These investments are worth USD $50 billion.20 This puts the IEA’s predicted increase in gas consumption in doubt. Large investments in gas infrastructure are needed, according to the agency.21

Also, LNG’s high emissions threaten shareholder value.22 We can take Australia’s LNG export industry as an example. Australia is the world’s largest exporter of LNG, ahead of Qatar.23 The country’s three biggest LNG customers are China, Japan and South Korea. All three have committed to net-zero emissions targets. If they respect them, these countries will cut their LNG imports.24 This potential for stranded assets would only add to the worries of Australia’s LNG industry.25

Should I invest in LNG?

To recap, the natural gas industry has experienced financial instability. This means that there is likely to be a more volatile LNG market in the future.26 In turn, this will reduce demand in emerging Asian markets.27 On top of this, emissions reduction plans will also cut LNG imports.28 So, your money would be better spent elsewhere.

What are my alternative investment options?

An investment in renewable energy will increase shareholder return.29 That is because renewable energy has grown at an exponential rate. It generated almost 30 per cent of global electricity capacity in 2020, according to the IEA.30 The election of US President Joe Biden will only boost investment in renewable projects, say financial forecasters.31 There are a number of renewable energy shares to choose from.32

At home in Australia, renewable electricity generation more than doubled from 2009 to 2019.33 The price of large-scale renewable energy batteries has dropped dramatically recently. As a result, the gas industry now faces stiff competition from renewables.34 So, electricity companies have put on hold their plans to build gas-fired power plants.35 This is another blow for the LNG industry.

Fortunately, Australia has some of the world’s best renewable energy resources. It can emerge from COVID-19 as a renewable-export superpower, according to WWF Australia and Ernst & Young.36 Already, nearly two-thirds of Australian investors say that they will increase investment in renewables. 37

One project to keep an eye on is Sun Cable. It is an AUD $22 billion solar power project in the Northern Territory. It will export clean energy to Asia. This would further reduce the region’s reliance on LNG. Billionaire investors back Sun Cable. Just as importantly, the federal government is also a supporter.38

So, if you want to invest in energy, steer clear of LNG. There’s simply too much uncertainty involved. Instead, explore your investment options for renewables.

Furthermore, when investing, we implore you to seek professional advice in addition to personalised financial advice. At New Energy Focus, we are not providing or advocating any investment suggestions.

Sources

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  2. Technology, E.I.P. and (2020). Utility Investors Risk Billions In Rush To Natural Gas: Is It A Bridge To Climate Breakdown? [online] Forbes. Available at: https://www.forbes.com/sites/energyinnovation/2020/03/04/utility-investors-risk-billions-in-rush-to-natural-gas-is-it-a-bridge-to-climate-breakdown/ [Accessed 9 Apr. 2021].
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