LONDON () -- As global demand for energy grows in leaps and bounds, Liquefied Natural Gas (LNG) is acquiring a new importance as a source of this energy. Whilst conventional natural gas necessitates costly pipelines for transport, making it uneconomic to sell into highly distant markets, LNG is liquefied through intense refrigeration and can hence be loaded onto ships in sufficient quantities to be economically transported huge distances. This means that gas can be taken from areas in which it is abundant, but demand is slender and sold in the huge industrialised markets in which demand typically outweighs local supply by huge multiples.
A novel way of investing in this activity can be found in LNG Limited [ASX:LNG], a recently floated Australian outfit that intends to focus initially on sourcing LNG from relatively minor resources of gas that fall below the horizons of the oil & gas super majors of which the business is usually the preserve.
Right now, LNG Limited is in negotiations to secure the foundations of its first project. This will be the Senoro project in Indonesia, where LNG Limited's Managing Director Maurice Brand is in the process of formulating an agreement to garner access to the requisite gas resources to feed the gas liquefaction plant the company intends to build in the country's Central Sulawesi region.
This gas is intended to be sourced from the Senoro-Toili field, located onshore a fairly short distance from the site of the proposed LNG plant. The Senoro-Toili field is jointly owned and operated by Pertamina, the state controlled oil & gas firm of Indonesia, and MedcoEnergi, the independent Indonesian oil & gas firm listed on the Jakarta and Luxembourg stock exchanges.
Brand expects to come to an arrangement with the Indonesian duo whereby they will supply the necessary feedstock for LNG's plant from the Senoro-Toili field for a period extending over the next twenty years or so, which would require that they invest new productive capacity. For its part, LNG Limited will construct the gas liquefaction plant, storage facilities and marine load out. The exact fiscal scheme under which the project will be operated and constructed is yet to be finalised, but needless to say, there is the potential for substantive revenue to accrue to LNG Limited.
The Senoro project is expected to require total capital expenditure of around $160 million, though Brand suggests that this figure may increase in order to incorporate extra capacity. LNG Limited would reportedly be likely to fund its portion of the required capital expenditure through a mixture of conventional debt based finance accompanied by the ceding of equity stakes to the relatively new breed of infrastructure biased investment vehicles that are currently in vogue, particularly in Asia.
According to current estimates considered feasible by LNG Limited, the Senoro project could convert 120mscf of gas into 2400t of LNG every day, equating to 870,000t annually; by no means an insignificant figure, although the world's largest LNG projects can produce ten to twelve times this much. In addition, the company may consider approximately doubling this output once the project is up and running, after which expansion could be achieved relatively easily by upgrading or adding to only certain components, as others, such as the marine load out, would already be of ample capacity.
As to a timescale for the Senoro project, Brand envisages the commercial and financial basis being in place by the middle of next year, with the project coming on stream in the first quarter of 2008. Investors should however be aware that the possibility of political or administrative delay is frequently a significant one when working in a state like Indonesia. This said, Brand imparts that support for the company's venture within the Indonesian government has been encouraging.
In the more distant future, LNG Limited is planning to attempt a project in Iran, where the standard concept of political risk arguably takes on a whole new dimension, but the gas resource base has its attractions. The key point for investors to remember though is that LNG Limited's immediate and quite possibly the bulk of its longer term future lies in Indonesia, where the political and administrative environments, whilst having undeniable shortcomings, are markedly less daunting than those in Iran.
Whilst small scale by industry standards, LNG Limited's business model has the potential to reward its shareholders handsomely, both in the medium term as the Senoro project takes shape, and in the longer term if the company is able to expand and apply its model within Indonesia and elsewhere, with Iran being currently in the frame as aforementioned but other suitable locations doubtless extant.
After a surge in LNG Limited's share price following its listing last year, the company's valuation has settled back significantly, though it has shown signs of stirring in recent days. This puts those investors that are confident of LNG Limited's prospects in a good position to buy in now and then reap returns later, both from the likely upward rerating that the company could see once the building blocks of the Senoro project are in place, and from the very interesting possibilities for other projects that may lie further down the line.