Grant Willis, Commonwealth Bank of Australia: Energy market is open to foreign investment.

HOUSTON -- How do you spell the future of Australia? L-N-G.

Situated geographically below the rapidly growing economies of Asia and geologically above a vast reserve of natural gas, the country is primed to become the world’s leading supplier of liquefied natural gas by 2020. This was the collective assessment of wizards of finance, government and industry at the Australian American Chamber of Commerce’s 6th Annual Energy Conference in late January in Houston.

“We cannot be beaten for location, cannot be beaten,” said Kim Beazley, Australia’s ambassador to the United States and former defence minister and deputy prime minister, during an executive round table discussion at the conference.

Among the factors that tilt in Australia’s favor:

  • Technology: Cost-effective ways have been developed to identify and extract resources.
  • Supply and demand: Australia’s ability to provide rises along with Asia’s expanding need.
  • Energy industry open to partnership.

“As you would expect, the market is incredibly open to foreign capital and foreign investment,” said Grant Willis, global head of natural resources for Commonwealth Bank of Australia, in his keynote address.

The Australian oil and gas sector, dominated by mid-cap companies, offers particular opportunities for foreign companies to invest through partnerships. The median market capitalization on the Australian Stock Exchange is $20 million, Willis noted. “With the exception of the top three — Woodside (ASX: WPL.AX), Oil Search (ASX: OSH.AX) and Origin (ASX: ORG.AX)— the remaining companies have market caps of less than $2 billion,” he said.

“Only Woodside has the capital to develop projects on a stand-alone basis.”

Of the nearly $240 billion worth of investments in place for the energy sector, $195 billion is for LNG projects alone.

The energy markets in this very large country (7.692 million square kilometers) are anything but homogenous. In the west, prices are affected by global conditions; domestic supply and demand governs prices in the eastern part of Australia.

“Prices between the east and west coasts vary quite markedly,” Willis said about LNG. “For example, prices in the east are well below prices in the west.

In 2012, exploration costs in Australia were approximately $4 billion, with expectations that it would rise to $4.5 billion in 2013. The majority of that activity was in western Australia, mostly in Queensland.

To be sure, there are constraints in entering the Australian market at this early stage, Willis acknowledged, especially in the service sector. Among them:

  • Transport
  • Low rig counts
  • Infrastructure

Foreign politics could also play a role. U.S. producers are restricted by in how much gas they can export, but are lobbying the U.S. Congress for greater access to foreign markets.

“If there is one significant black swan, it is the possible decision of the U.S. government to allow the export of natural gas,” said Rod Eichler, executive adviser to the chairman, Apache Corp. (NYSE: APA), during the round table. “Asian buyers, who have been paying $18 to $19 per thousand Btu for LNG, will have the opportunity to access LNG at Henry Hub prices ($4.89 in early February).”

Beazley acknowledged the dominant position of the U.S. in domestic gas production.

“This country’s full of holes,” he joked. “It’s like a giant sieve. You could clean our clocks. There’s absolutely no way that we can compete with the U.S.”

But the resources are large and certain. Australia’s energy industry is just beginning to pick up its pace.

And the hurdles that industry players face?

John Howell, president of Portfolio Decisions, a management consulting company, and moderator of the round table discussion, recalled how hydraulic fracturing was viewed when he was with Shell in the 1980s. The method was dismissed by many as uneconomical, but his colleagues had a different attitude: “We will find a way to make it happen.”

“Australia succeeds as a country,” Beazley said, “basically because Australians believe that solutions require complex thought.”

“The industry is in robust health and oil prices remain high,” Willis said, describing his bright outlook for the sector. “There is no shortage of projects under consideration.”