The Coming Natural Gas Export Boom
You probably know that natural gas prices in the United States are the lowest they’ve been in decades. But you may be surprised to learn that they are as much as 10 times higher in other parts of the world.
That’s because regulations and a lack of export capacity in the United States are currently keeping the glut of natural gas bottled up at home, rather than releasing it to be absorbed by overseas markets.
The reason is that many industries – such as transportation and chemical producers – have lobbied to keep their input costs low by keeping natural gas supplies cheap. Furthermore, politicians see added incentive in maintaining low prices for consumers.
So as it stands now, gas companies can’t export fuel to countries that aren’t free trade partners.
However, things may finally be about to change… sort of.
Recent studies have shown that the impact on natural gas prices will be relatively muted so long as the export of the fuel is limited. So the compromise will likely be that the United States will permit the export of a limited amount of liquefied natural gas (LNG) – perhaps as much as 10% to 15% of its total production.
For instance, Peter Coleman, CEO of Woodside Petroleum (PINK: WOPEY), expects the United States to export as much as 50 million metric tons of the fuel by 2025. Woodside is the operator of the Pluto LNG project in Western Australia. Other analysts believe that figure could be as much as 100 million metric tons per year.
And given demand elsewhere in the world, those exports could fetch far more than $2 per cubic foot.
Natural gas prices in Europe are about $10 per cubic foot. And when Japan faced power shortages linked to the shuttering of nuclear plants earlier this year, that country paid as much as $20 per cubic foot.
Japan will need to import as much as 90 million metric tons of LNG this fiscal year, up nearly 10% from 2011, to generate the power needed to compensate for shut nuclear reactors.
Unfortunately, non-U.S. companies are currently meeting that demand.
Other energy consumers the world over are looking to make natural gas a bigger part of their energy picture, as well. But they lack adequate supplies.
China will double its natural gas consumption over the next five years, becoming the third-largest importer of the fuel behind Europe and Asia Oceania, according to the International Energy Agency (IEA). However, China doesn’t have the technology or expertise of Western oil majors. So even though it’s home to the world’s largest deposits of unconventional natural gas, the country has no way of extracting them.
Meanwhile, countries in Europe lack not only the technology, but in many cases the political will to develop their own resources, making imports a necessity.
The United Kingdom, France, Bulgaria, the Czech Republic and Romania have all either banned or temporarily suspended fracking due to environmental concerns.
As a result, these countries are forced to turn to less reliable and more expensive sources for their energy supplies. For instance, 25% of Europe’s natural gas comes from Russia, which uses its leverage to extort payments and political favors from its neighbors.
In January 2006, Russia cut supplies to Ukraine – through which 80% of Europe’s gas supplies flow – for three days, causing gas volumes across Europe to fall. Three years later, it happened again, leading to an 80% drop in natural gas supplies to Italy, a 75% decline in supplies to Romania and a 33% drop in supplies to Greece.
That’s why Wood Mackenzie estimates that by 2020 Europe will be using more shale gas produced in the United States than from domestic fracking. And LNG imports to Europe are expected to grow 74% by 2035, with Italy, Poland and Lithuania already building terminals to receive the fuel.
A Not-So-Simple Solution
Clearly, the United States has a terrific opportunity to cash in here. But so far, only one company – Cheniere Energy (NYSE: LNG) – has won approval to build an LNG export terminal.
Cheniere’s Louisiana terminal is scheduled to begin operations in 2015, and will ship supplies out to clients such as London’s BG Group PLC (PINK: BRGYY), Barcelona’s Gas Natural Fenosa, GAIL India Ltd. (PINK: GAILF) and Korea Gas Corp.
Cheniere also has applied for permission to export LNG from another export terminal to be located in Corpus Christi. The company would like to have that facility operating by 2017 or 2018. Additionally, competitors like Dominion Resources (NYSE: D) and others are lined up waiting for permits to start exporting LNG. Dominion aims to ship the fuel out of its Cove Point terminal in Maryland.
However, these licenses won’t be approved until at least the third quarter of this year, when the Energy Department completes a study of the potential effects on natural gas prices.
Early indications are that further exports of LNG will be approved, but only with a cap.
Still, that’s good news for natural gas companies – and not just Cheniere and Dominion.
ExxonMobil (NYSE: XOM), Chesapeake (NYSE: CHK) and others will delight in the opening of even a small relief valve to help rid the current supply glut. And if natural gas prices don’t soar significantly higher when that happens, there’s a good chance we’ll see more LNG export approvals.
That would be a very bullish development for a commodity that’s already considered the ultimate contrarian play of 2012.
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