Like crocodiles awaiting a wildebeest crossing, Washington lobbyists are sharpening their tools in readiness for what promises to be another multi-year, multi-front public policy debate. The issue: should the United States export significant amounts of its new-found natural gas resource cornucopia. It is ironic that just a few short years ago, predictions of natural gas production shortfalls were so widely embraced that plans were afoot to build numerous LNG import facilities. This reversal should bring forth deep feelings of humility among energy pundits and experts and should make the public wary of "consensus" long-term energy projections but that would be like asking investment banks to use less leverage.
Some background facts may be helpful here. As the table below demonstrates, the United States is still a net natural gas importer, although the import levels have declined markedly from a peak in 2007 (all numbers are in billions of cubic feet of natural gas).
The imports and exports are overwhelmingly overland using pipeline connections. Over 90% of the 2012 imports will be from Canada and over 95% of the exports will be to Canada or Mexico. Despite our surplus of natural gas, imports make sense in certain situations because of proximity to production and available pipeline facilities. Even LNG imports on a very small scale can make sense at the end of a long pipeline system, where the cost of expanding the entire pipeline to meet peak demand may be less than the cost of injecting gas from LNG delivered close to the demand center for use solely at times of peak demand.
Natural gas has always been the most regulated of the fossil fuels and exports are subject to certain federal regulatory requirements. Export facilities must be approved by the Federal Energy Regulatory Commission and exports themselves must be approved by the Department of Energy under a "public interest" test which emphasizes security of domestic supply. Exports to countries with which we have Free Trade agreements are "deemed" to be in the public interest but it is generally agreed that the demand for exports is not primarily in to such countries. In addition, Congress can, of course, pass legislation addressing the topic.
The Department of Energy has recently commissioned a study which generally found that exports would be in the national interest but also found that under some scenarios exports could increase the domestic price of natural gas by as much as $1.11 per mcf. Each side in this debate will likely be armed with "studies" and "white papers" and you will all be reading more and more about the nuances of the legal and policy arguments over the next year. My purpose here is to try to identify some of the "stakeholders" who will probably line up on each side of the debate and to suggest how the debate may affect investments.
PRO EXPORT TEAM
1. Natural Gas Producers - Natural gas producers (and oil field supply companies, drillers, drilling and exploration companies, oil field service providers) will support a policy permitting exports because exports will provide a reliable source of demand and the increased demand should have the effect of higher prices. Big Oil is also very heavily Big Gas and there doesn't appear to be any reason why Big Oil's petroleum activities create a conflict here. So the entire "oil and gas industry" should be signed up for this fight. Look for a little positive action in gas-heavy stocks like Chesapeake Energy (NYSE:CHK), Anadarko (NYSE:APC) and Devon Energy (NYSE:DVN) on stories concerning this issue. A big win for the export folks could lead to a pop in the stocks.
2. Coal Producers - Other than the gas producers themselves, no one would be helped more by actions which increase natural gas prices than coal producers. As I have written before, coal is under pressure from natural gas in its most important market - electric utilities. The market is likely to see positive prospects for natural gas exports as a big plus for coal stocks.
3. Alternate Energy Producers - This one is a little more complicated. Most alternative energy (solar, wind, some biomass, etc.) is useful primarily for generating electricity. Cheap natural gas prices have created competitive problems for some in this industry and higher natural gas prices certainly could be beneficial. On the other hand, the industry has somewhat of a "safe harbor" in many states where utilities are required to use a certain percentage of alternative or renewable energy, regardless of whether natural gas is cheaper. The industry also depends very much upon a "good guy" reputation with environmental groups and advocates and it is not at all clear where environmentalists will stand on this issue. On the other hand, as an investor, I would see natural gas exports as a plus for this group of stocks.
ANTI EXPORT TEAM
1. Industrial Natural Gas Users - We all know of natural gas as an electric utility fuel and as the dominant fuel for home and office building heating. In addition, natural gas is a very important fuel for certain industries, in some cases, as a feedstock for chemical production and in other cases, because of unique advantages in certain production processes. Industrial users are protective of their natural gas supply because, in some cases, they literally could not do business without it. Of course, this probably means that they are now paying much less than they would be willing to pay and that they are also paying less than many of their overseas competitors. Rumblings from this sector have already been heard. Stocks of chemical companies like Dow Chemical (NYSE:DOW) and DuPont (NYSE:DD) may be affected somewhat by the twists and turns of this debate.
2. Residential Users - The vast majority of homes in the United States have natural gas water and space heating and any increase in the natural gas price will mean an increase in utility bills for these homeowners. Consumer groups, state utility commissions who will be the ones who have to raise rates, and other advocates of this interest group are likely to be a powerful force in any debate on this issue.
3. The Natural Gas Transportation Industry - I have written before about attempts to convert vehicular transportation from petroleum products to natural gas. The companies that are leading this effort - Clean Energy Fuels (NASDAQ:CLNE), and Westport Innovations (NASDAQ:WPRT) - are likely to oppose the export of natural gas because of its impact on prices. Their stocks will probably see some impact from the ups and downs of the export debate as well. On the other hand, even with the price increase suggested by the DOE study referenced above, natural gas prices would still beat petroleum based transportation fuel prices by a substantial margin
4. Electric Utilities - A big proportion of the increase in natural gas production is going to the electric utility sector. While electric utilities can use other sources of energy to generate electricity, the abundance of natural gas has certainly made their lives simpler. Without it, they would have to choose between the uncertainties of nuclear power with its long and expensive construction schedules, continued investments in upgrades to coal plants, and expensive alternative energy. On the other hand, the regulated part of this industry gets to pass on its costs to ratepayers and the unregulated part of the industry will probably get higher prices for electricity if natural gas prices go up. I do not see electric utility stocks being heavily impacted by this debate and it is not completely clear how active this group of companies will be in the debate.
In the short to intermediate term, facility restrictions are likely to limit natural gas exports and the results of the debate are not likely to affect the operating results of any of the above companies significantly. In the intermediate (3 to 5 year) and long term, massive exports leading to much higher prices could have significant effects as generally described above. The prospect of this kind of long term impact may affect stock prices even in the short term.
The Administration has a fairly easy out here at least in the early stages of the debate. It would seem reasonable to permit additional exports at least until exports balanced imports and the United States was no longer a net importer of natural gas. After all, if we can reduce domestic demand through net imports, it would seem grossly unfair to producers not to permit offsetting exports. This approach would seem to justify the export of between 1 1/2 and 2 trillion cubic feet of natural gas per year. At the point at which permitted exports reached that level, further study may tell us more about just how large the domestic resource is, how fast we are moving to deploy natural gas powered vehicles, and other relevant information so that an intelligent decision can be made about additional exports.