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The Natural Gas Revolution is Just Beginning

We already know that natural gas is the fuel of the future. But now we have some numbers to attach to it.

According to the International Energy Agency (IEA), the switch – at least for U.S. consumption – will happen in 2030.

Now, we don’t need to put too much faith in the IEA’s specific numbers. Our colleague, Louis Basenese, already took the IEA to task for failing to make a specific oil price prediction. And personally, I think that the speed of natural gas adoption in the United States could be even quicker than the IEA suggests.

Still, the overall insight remains true.

The IEA’s World Energy Outlook projects that U.S. natural gas production will rise from 650 billion cubic meters this year to 800 billion by 2035. It also projects that the U.S. will consume 93% of its own production and export the remaining 7%.

Those exports will fuel the international markets, where rising demand will be driven by rising consumption in China which is expected to quadruple gas use by 2035.

Since the IEA can’t accurately predict where oil prices will be as early as next month, I’m not going to bank on the fine details of the prediction. But the analysis does provide a rational outcome based on a two simple facts:

  • The world will always want energy.
  • The cheapest energy source for now and the foreseeable future is natural gas.

Of course, the issue that we’ve been tracking is that this abundance doesn’t bode so well for those betting on natural gas prices. If production continues to expand, prices will stay depressed.

That should be of concern to a properly aligned investor. The profits in the natural gas industry may not come from producers, but from the expanding infrastructure under development to support them.

Take for instance, Gazprom (OTC: OGZPY). The Russian gas giant is the definition of a monopoly, with $29 billion in revenue, strong ties to the Russian government and military, and an extremely catchy theme song. But low gas prices have taken it to the cleaners. Second-quarter profits were down 50% over last year.

Gazprom’s plan for the future includes building infrastructure to export LNG to growing Asian markets. That project is expected to cost $45 billion.

Or take the IEA’s projection that the United States will be exporting 7% of its energy production. We don’t have the capability to do that right now. And the cost to get it will be massive.

Just look at the one project that’s actually been approved by the Federal Energy Regulatory Commission, and you’ll the see scope of necessary investments.

Cheniere Energy (NYSE: LNG) was approved to build a facility that will chill and compress gas into a liquid state so it can be transported by special LNG ships. But the first gas won’t come through it until 2015, and the project will take at least $4.5 billion.

These investments will be happening globally, on a massive scale. And we’ll be tracking the builders that get it done… even if natural gas producers keep getting squeezed by low prices.

Ahead of the tape,

Matthew Weinschenk

Matthew Weinschenk