The demand for liquefied natural gas (LNG) has reached new heights.
Applications with the U.S. Department of Energy from companies wishing to produce and export LNG are approaching 40 billion cubic feet (bcf) per day.
To put that in perspective, the total daily production for natural gas is about 76 bcf right now.
What’s the big deal with LNG?
Well, it mostly comes down to the spread between what we pay in the United States for gas and what many other countries in the world are willing to pay.
You see, natural gas in the United States is selling for around $4.50 per thousand cubic feet (mcf). Many other countries are paying above $10 per mcf. In Japan, they’re paying upwards of $15 and $20.
So the profit potential for exporting natural gas as LNG is undeniable.
But don’t put all of your chips in on the U.S. LNG movement just yet.
Here are five reasons why…
Reason #1: U.S. Exports Take a Backseat. The United States might be in the top five worldwide when it comes to natural gas reserves. But it doesn’t even rank in regards to LNG exports. Other countries like Qatar and Malaysia are way ahead of the United States. Take a look…
Reason #2: The Spread Isn’t As Big As You Think. While the cost to bring natural gas to market is in the low $4s, costs are closer to $7 per mcf equivalent of LNG. Suddenly, the spread between what gas sells for in the United States and what it sells for overseas just got smaller.
Reason #3: Nothing Lasts Forever. As more consumption shifts towards natural gas from coal, nuclear and oil, the price of natural gas will eventually move higher. We could see it hit the $8-per-mcf level by the end of this decade.
If that happens, the price of LNG equivalent would move higher, as well – to over $10. So that would narrow the spread even more. And let’s face it… the LNG story is only “hot” while the spread is big enough to boost profits.
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Reason #4: Terrible Timing. It’s important to note that the 40 bcf in LNG applications I mentioned above are simply that: applications. LNG plants are notoriously slow to not only gain approval, but also build and put into production.
In fact, it will probably be the end of the decade before the majority of U.S. LNG operations are up and running. Since that coincides with the massive price increase I mentioned in Reason #3, the spread will be narrowing at exactly the same time – lowering the profit potential for these new operations.
So the timing for these new LNG plants couldn’t be worse.
Reason #5: Competition Stacking Up. LNG faces steep competition from renewables and nuclear. Consider that Japan’s Fukushima crisis is one of the reasons that LNG prices and exports soared. The country was forced to shut down its plants and resort exclusively to fossil fuels like oil and LNG to make up the difference. Now, most of their nuclear plants are up and running again.
Bottom line: Increased competition for gas reserves at home, increased competition from suppliers abroad, and a tightening spread may lead to lower and lower profits for the LNG sector.
There’s money to be made from the sector, of course. But be sure to focus only on companies that are already exporting the product today.
These companies are able to lock in the spread now, while everyone else will be late to the party.
And “the chase” continues,
P.S. In July, I will be speaking at The Sprott Vancouver Natural Resource Symposium – alongside my friend, Rick Rule, and a multitude of resource speakers. There’s no better time of the year to visit this gorgeous city. If you’d like to join me, you can find out more about the conference here.