Liquefied Natural Gas: The Forgotten Energy Boom

“See that field over there…by the ocean? That’s where it will be. These projects are going to bring prosperity to my country my American friend.”

That’s what my guide told me. I was in Papua New Guinea at the time looking into an energy boom the whole world seems to have forgotten about. The way things are shaping up, though, this is the time to start thinking about it again.

It’s going to be bigger (and more profitable for investors who pay attention) than almost anything else you’ll find out there in the energy sector.

Sure, government subsidies for solar and wind power will help get those sectors rolling again. And the potential for a “cap and trade” carbon tax system is turning eyes back to geothermal power. But there’s a bigger boom right under our noses. It’s one that doesn’t require any government support. This one is going to be big – real big.

Cambridge Energy Research Associates (CERA) says it’s "the next truly global energy business opportunity.”

John Gass, a division president at Chevron (CVX), says this boom is “all but inevitable.”

Daniel Muthmann of E.On AG (EONGY.PK), a $56 billion European energy/utility behemoth, says there is a “tidal wave” on the horizon.

Like I said, it’s going to be big. More importantly, it has been almost completely forgotten about. Just look at who's talking about it above. These folks aren’t exactly the Buffetts and Roubinis of the world. They can’t move markets with a brief statement. They’re energy insiders. And they see what’s coming.

I’m talking about liquefied natural gas, or LNG.

Cleared for Liftoff…Finally

LNG has the potential to change the world’s energy landscape. As with all changes, there will be great opportunity and equally great risk of loss. For those of us who are getting prepared now, we’ll get the former and avoid the latter.

LNG is nothing new. It has been around for years. LNG is natural gas which has been chilled to the point that it becomes a liquid. In liquid form, it’s pumped onto specialized LNG tankers and shipped all over the world.

The LNG delivery process is pretty basic as well. It is first pumped out of the ground. Then it is transported to a liquefaction plant where the natural gas is turned into liquid form. It’s then shipped to one of the dozens of regasification plants around the world. There it is turned back into a gas and sent via pipeline to the end user.

The end result of this boom will make natural gas a truly global commodity. That’s a huge change for natural gas.

Before the downturn, natural gas prices were different in every major market. Natural gas prices peaked in North America around $14 per Mcf last summer, but hung around the $6 to $10 range leading up to the bubble. European countries like England and Spain had to fork over $10 to $15 per Mcf. Japan and China were paying $15 to $22 per Mcf of natural gas.

That’s a pretty wide range of prices for a commodity. Especially when you consider a pound of copper, an ounce of gold, and a barrel of oil are pretty much the same price around the world. The reason natural gas prices varied so greatly was because it was consumed primarily by the continent that produced it.

That’s all starting to change... rapidly.

Pipelines used to be the only way to transport natural gas. Now, with the growth of LNG, ships can carry it anywhere in the world. Natural gas is becoming a truly global commodity and the implications will be big.

That means natural gas demand from India and China will have an impact on prices in North America, and vice versa. As the LNG market matures, we could see global natural gas prices rise a good bit higher. That’s over the long-term though. Over the short-term, there is a much different story.

Global Gas Glut

The LNG market is still in its relative infancy. Last year less than 90 million tonnes of natural gas were shipped globally. To put that in perspective, it’s the equivalent of about 780 million barrels of oil. That’s less than 10 days of world oil consumption.

So to say the LNG market is pretty small is an understatement. There’s a lot of room to grow here. And it’s growing.

An additional six liquefaction plants will come on line by the end of this year. These facilities will produce a lot more LNG. Together they will nearly double global LNG production over the next few years.

For instance, the massive Sakhalin II project off the coast of Eastern Russia just shipped its very first LNG shipment to Japan a few days ago.

An expansion of the liquefaction plant in Indonesia is expected to come on line by the end of the year.

And then there’s the big one. QatarGas’ (DOH:QGTS) liquefaction facilities are going through a major expansion. This project will bring an additional 24 million tonnes of LNG on the market this year. That’s nearly a 30% increase in LNG supply overnight.

The key thing here is not how many facilities are coming on line; it’s where they are.

The Sakhalin Island in Russia has huge natural gas reserves. For years, though, they were “waterlocked” (the inverse of landlocked). There was no way to get the natural gas to end users. That is, until the Sakhalin LNG facilities started coming on line.

The LNG production facilities in Indonesia are important too. There has always been very little domestic demand for Indonesia’s natural gas. Indonesia is “waterlocked” too, except for Papua New Guinea to the East. Indonesia’s natural gas was stuck on the island. That is, of course, until LNG became a reality.

Finally, QatarGas is the big player. The Middle East has a lot of oil and it has a lot of natural gas too. Once again, domestic demand couldn’t soak up all the natural gas produced along with the oil. Pipelines to lucrative markets in Europe were too expensive to build. Qatar’s gas was unusable. Or rather, it was unusable until LNG came along.

That’s the key here. LNG is unlocking huge natural gas reserves around the world. Indonesia, Papua New Guinea, Eastern Russia, and all across the Middle East are now able to tap and sell their natural gas reserves. The gas can now be transported, relatively easily and inexpensively, to the markets with the highest bidder.

As you might expect, the ramifications of the ongoing LNG boom will be sizable. There will be some big winners and big losers. That’s why I’m recommending a slightly different strategy to capitalize on this boom.

Safety First

The LNG boom has been put on the back burner by many investors. As we looked at last week, natural gas prices have fallen 75% in 10 months. Natural gas companies are shutting down production. The number of natural operating gas rigs has been halved. Technological development has made massive reserves in the United States economically feasible to tap into. There are a lot of negatives for natural gas in the near-term, but LNG is global. And we have to think globally.

The longer-term picture is much different. The economic downturn won’t last forever. The world is looking for energy sources cleaner than coal. The U.S. is about to change the economics of electricity production.

The LNG boom will have severe consequences for many natural gas producers. In North America, the prospect of importing more and more natural gas will force many marginal producers (like shale gas companies) to cut back production.

That’s why I recommend sticking to the “picks and shovels” of the LNG boom with your safe money.

The LNG boom has already begun. And it’s only going to get bigger. The companies which build the infrastructure to make LNG are going to do exceptionally well over the next few years.

When it comes to speculation though, there are some solid opportunities in small natural gas exploration companies. The companies which acquired natural gas reserves a few years ago picked them up for practically nothing.

Think about it. A natural gas field in the jungles of Papua New Guinea or Indonesia was pretty much worthless before LNG came into the picture. Now, those worthless reserves are worth millions – potentially billions. And they will only continue to increase in value as the world begins to realize how big LNG is going to be.

Above all, we can learn a lot from the imminent LNG. This is one of those stories which take a while to develop. LNG is not hot. We’re going to see 10% moves in a day. Frankly, it’s going to take a few years for the world to realize how big it is really going to be.

Wall Street hates that. It refuses to look ahead by more than a few weeks. But now, while the whole financial world is focusing on the bank problems or the nuances of the latest government bailout plan, there is opportunity for the rest of us to look ahead.

Entire industries don’t get turned upside down without opportunities to capitalize on it. I’m confident LNG will bring some prosperity to Papua New Guinea as my guide expected. Given the growth I expect in LNG over the years, it will bring some prosperity to us too if we’re patient and prudent. The LNG boom, and the massive opportunities which come along with it, are certainly ones to keep an eye on. And we will.

Comments

[Conan the B...:]

UnclePie: I thought that Woodside suspended construction of its LNG facility because of cost.

LNG bypasses the Russian stranglehold on NG pipelines to Europe.

Apr 07 12:36 PM

[bcncv:]

Good article. I'm a long term believer in LNG, although there is going to be some pain in the short term. I sum up the selling points of LNG as:

1. Highly valuable to Europe, as it is a non-Russian source of energy.
2. Will increase in value and competitiveness with any carbon cap or tax implemented.
3. Can (but won't necessarily) bring energy to regions that don't have natural sources of power.
4. Will become the most cost effective solution in regions with gas infrastructure where local supplies eventually run out. It is also a beneficiary of overall energy demand increases.

Disclosure: Long BG Group

Apr 07 01:12 PM

[Uncle Pie:]

The Woodside Petroleum website states that they expect to complete the $12 Billion (A$) Pluto LNG project in 2010. They have a lot of projects going on in various places, and have perhaps suspended construction on one or more of these temporarily due to the current low gas price. I don't follow the company in detail so I can't give you a breakdown but you can easily look on the website for updates on their various projects. Their stated intention is to be the world's largest LNG company by 2015. Having Shell as a 1/3rd owner means that they have a partner with very deep pockets.


On Apr 07 12:36 PM Conan the Barbarian wrote:

> UnclePie: I thought that Woodside suspended construction of its LNG
> facility because of cost.
>
> LNG bypasses the Russian stranglehold on NG pipelines to Europe.
>

Apr 07 01:24 PM

[aarc:]

If there are going to be lots of LNG production expansion in the near future; how can natural gas price can go up dramatically when there is no corresponding increase in demand greater than that of supply ramp up?

There must be a corresponding increase in new demand that will be able to absorb the new supply.

That means either increasing existing demand through current LNG usage or creating new applications for LNG, or both. It is going to take a very long time to achieve this.

How about converting machineries, heat exchangers, and power plants that are currently using oil and/or coal, can they be converted to LNG relatively cheaply? LNG has lower heat content than both oil and coal per unit volume. Those machines and equipment might perform relatively poorly when converted to LNG and may prove to be not cost effective at all. LNG may have to be priced a lot lower than most producers would accept in order to be able to encourage existing oil/coal users to convert into LNG.

Over-supply might as well become the norm in the near future than supply shortages for LNG.

Apr 07 01:51 PM

[H.J. Huneycutt:]

While this article does point out an emerging trend and the author does an excellent job analyzing Liquified Natural Gas, I can not reach the same conclusion in regards to natural gas prices. In fact, I've become increasingly bearish on natural gas. There is already an oversupply in the market and the land-based natural gas suppliers here in the US haven't really slowed production dramatically. Meanwhile, there is all this talk of brining LNG into the fold. As aarc correctly points out above, how could this not cause natural gas prices to fall?

Natural gas almost sounds like it's heading into the same situation as DRAM did earlier this decade where everyone is talking up the stocks based on the wonders of new technologies, all the while supply is being dramatically increased and prices plummet as a result.

Companies that drill for natural gas and are involved in "natural gas infrastructure" sphere (so to speak) are probably poised to benefit at some point, but I don't think I want to touch any of the natural gas companies at this point. Not even the "good ones" that I'd really like to invest in.

Apr 07 02:17 PM

[Paul Harper:]

aarc & HJ,

from a European persective, ths is not a new thing, as we have been working on gas for a much longer time. The usual issues that spring to mind for the US are lack of infrastructure required to distribute to the last mile & also converting existing users.

as commnted previously, we are v much in favour of LNG, as this allows us to not become so reliant on supplies from corporate baddy Gazprom.

for the US, I feel thi will b a long (but in the long term valuable) long game, helping the US wean itself off of such high oil dependance.

Apr 07 02:35 PM

[Herr Jordan:]

Theoretically, natural gas is the best answer to diminishing world oil for powering combustion engines just as nuclear energy is the best answer for American heating and electrical energy needs.

But simple market forces don't seem to be able to break through irrational political log jams, and most people are attracted to more romantic but unrealistic energy solutions such as solar, battery and wind.

It's probably better to buy Pizza Hut (heart attacks) Coca Cola (tooth decay) and R.J. Reynolds Tobacco Company (lung cancer) if you want to make money.

Seriously, I don't know what the solution for this problem is but I know that I don't want to lose money buying stocks that SHOULD grow in value instead of stocks that WILL grow in value.

Charity or government subsidy is probably a better solution.

Apr 07 03:21 PM

[John Aislabie:]

Well here we are again. In the 70s oil shock and sudden lift of gas prices as demand briefly got ahead of production, the slide rules(then!) came out and showed that LNG had nowhere to go but up. Algeria started building LNG facilities, receiving ports were started all over and generally it was clear that LNG had a great future with stable if not rising prices well into the future.
What happened is then what always happens; the supply of gas started to rise as previously uneconomical reserves became economical (remember all those Anadarko basin deep drills). At the same time oil was in oversupply as demand had fallen (sound familiar?) and the OPEC countries were only too ready to come forward and pick up any energy demand increase. And so with a huge oversupply of energy, prices fall, the capital intensive LNG projects get handed their heads and a lot of money gets lost.
Actually LNG is a great resource, and as the oil play gets more expensive and demand limited a great deal of money will eventually be made, but I worry that the timing (as always) is everything and right now is again not the timing.

Apr 07 03:36 PM

[Fighting Yoda:]

US is surplus Nat Gas by a wide margin, if it has to compete with LNG – it will not be good for either.

Apr 07 06:31 PM

[jarco:]

Contrary to what you read here, shale gas is not expensive given the latest horizontal drilling techniques and the vastness of recent discoveries. Current price drops reflect a resulting supply increase coupled with a slowing economy.

Natural Gas fires the bulk "peaking power" segment of our electric utilities. The demand for this peak power has dropped dramatically. Additionally, NG is the feed stock for many chemical processes. Ammonia fertilizer production, for example, has suffered driven by declining farm aceage.

Bottom line, NG use is expected to grow at record rates as the US ecomony recovers. Remember, we are energy hogs and oil even at $50/barrel is over twice as expensive as NG. A barrel of oil is BTU equivilant to 6 Mcf. NG needs to sell at $8.33/Mcf to be on par with oil. At that price, the EP's and XTO's of the domestic world will be highly profitable.

Finally, the cost to transport LNG to the US from the Mid-east or Far-east comes close to that baseline leaving little or no margin for domestic distribution.

Apr 07 10:30 PM

[User 305589:]

Andrew, just a few days ago you published your bullish opinion on Natgas and kept completely silent on the LNG boom (which could turn into a glut easily). How come?
LNG may be big, but it is hardly earning a return on investment for those vast projects at todays depressed nat gas prices. and it is more expensive than most domestic natgas play, make no mistake about that. LNG comes at a cost compared to 'natural' natural gas.
half of the lng terminals that have been set up over the past years calculating with about $7-$12/mcf will go broke over the next 3-4 years if prices stay where they are.

go figure, another big boom-bust story with plenty of money-loosing opportunitites

Apr 08 06:19 AM

[Delojozafado:]

Yesterday Dennis Gartman on CNBC, SPECULATED that the price of NG in the North American market could fall to $2.10/MM~BTU. There will be plenty of great investment opportunities as many posters here have noted. One poster noted that Shell owned a big stake in one project. Fine! then I look to purchase shares of (RDS/B) with their +7% distribution on the current re-tracement in oil and the market averages. $42/BBL seems like a good target to pull the trigger. Yesterday CHK-PRD also took a hit in the day end trading. Now yielding +7% and backed by the $40 billion company. The ex date is nearing, 5/28 and it will no doubt drop by nearly twice the value of the quarterly $1.125 distribution in the ex shadow period. Given the propensity of the market to, "sell in May...go away" a buy at near +/-$55. The AES is involved world wide with many projects fueled by Nat Gas, therefore the AES-PrC on a pull back near a recent low of $30 and with a great distribution is noteworthy. The British world conglomerate BG Group is a huge player but not much of a dividend payer. (BRGXF) or BRGYY). We also have (STO) recently announcing another good gas find offshore. The Finland Statoil-Hydro pays a minimal annual dividend which is to be announced in the next few weeks and most likely pays in May. probably about $.59/share this year. This is a mover in terms of percentage pops and drops and could be a very nice performer off a basing of Oil at $40. We would expect (STO) to move from $15 as a target low to $22 on oil recovering and eventually sustaining $60/BBL. There is also the (ENY) which is a 100% Canadian oil&gas play. Consisting of 70% O&G Can-Roys and 30% tar sands corps. As the Canroys are as a whole basically 60/40 Gas to Oil you could have an opportunity to gain a relatively good long term investment and again currently with a very generous 7% yield devoid of any Canadian trust withholding tax issues. (ENY) is setting up for a tanking as Mr.Carney "barker", the Governor of the BOC, a Cad clone of Ben the Dollar slayer will be announcing the terms of the BOC's "Q" easing plan. BOC has already indicated that they will make an announcement on the 24th of April in regards to this issue. We know it is going to happen we do not as yet know how pernicious a program is to be foisted on the Canadian debt holders. We should expect the Loonie to briefly break through .78/1.28 in the aftermath of the announcement. This will be the chance to buy all things Canadian that fit the Energy/Commodity with yield qualification.

LNG ... we are in the final scenes of "Trading Places", where Louis counsels Billy Ray "Not yet...Not yet.."

The dollar is stubbornly holding it's strength and that is attracting spot cargoes of LNG to North America. That along with the on going long term contract projects that have recently been completed or coming to completion will continue to pressure Nat Gas. We also have the relative weakness in the Canadian Oil sands projects. With oil below $60 these mining projects that are Nat Gas intensive as the fuel used to melt and drain the bitumen out of the sands are being cut back. Suncor recently announced a major curtailment to their "Firebag" project. This is creating a surplus of Canadian gas as well. The US has traditionally imported by pipeline ~15% of it's Nat Gas consumption from Canada. Two import markets are now competing for US customers. The Global gas market vs the Canadian market. We find now with the global recession the cost and wait time for the construction of the newest technologically advanced LNG carriers is now reduced. There is also a proposal to defeat a NIMBY terminal attitude in South Florida. It is proposed to construct an under sea pipeline from an existing receiving terminal in the Bahamas into South Florida. The Bahamian terminal would then be expanded and jobs could then be created for Bahamians instead of American workers. The LNG investment choices may in fact be very good long term bets. One should await a weaker market for stocks and energy before dipping in a toe and slowly accumulating beaten down equities related to this theme. At least with the dividend payers you acan stit around and be patient awaiting the next resurgence in Nat gas. We will certainly not see $10 gas any time soon but a $5 price off a bottoming of around $2.25 does look like a double.

Apr 08 08:11 AM

[john s. gordon:]

you can also transport NG (w/o refrigeration) in the form of MeOH (the conversion is easy). burns good in gas turbines for power generation.
> jack

Apr 08 09:21 AM

[Ferdinand E...:]

This is a an interesting and useful article.

But with respect to the comments, nobody is going to convince me that LNG makes more sense for Western Europe than Russian pipeline gas. I'm too smart to believe propaganda like that - especially propaganda containing nutty terminology like 'Russian stranglehold'. And I suspect that Russian pipeline gas will also have an important market in China.

As for the global supply of gas, some observers think that there is not as much as a few so-called experts think, although Russia, Iran and Qatar are well supplied. Perhaps I should also mention that I refereed a paper once in which the author proposed an OPEC-type arrangement for gas. Maybe that doesn't make sense today, but what about in ten years?

Apr 08 09:56 AM

[De Graaf:]

LNG is the 'way of the future', next to some other commodities out there of course.

I can recommend an strategic play which I will review in about 1 year on my weblog (monitoring this play currently) but I can supply the ticker at least; CVE:LNG.

Remember this one, operating in PNG, located next to InterOil hotspots with proven targets. This is a takeover play with vast amounts of land from former Invicta Oil & Gas.

Again, I'm coming back on this one in about a year from now on my weblog. Thats soon enough to get into the profit boom of LNG in PNG.

Cheers

Apr 08 10:47 AM

[Old Trader:]

I think that because of the current administration's proposed carbon tax, you'll see even more interest in gas-fired plants in the US. Regarding other uses, running vehicles on CNG is "old technology" that's been around for more than 20 years, and converting gasoline vehicles to run on CNG is a relatively inexpensive task, and there's no performance drop-off, either.


On Apr 07 01:51 PM aarc wrote:

> If there are going to be lots of LNG production expansion in the
> near future; how can natural gas price can go up dramatically when
> there is no corresponding increase in demand greater than that of
> supply ramp up?
>
> There must be a corresponding increase in new demand that will be
> able to absorb the new supply.
>
> That means either increasing existing demand through current LNG
> usage or creating new applications for LNG, or both. It is going
> to take a very long time to achieve this.
>
> How about converting machineries, heat exchangers, and power plants
> that are currently using oil and/or coal, can they be converted to
> LNG relatively cheaply? LNG has lower heat content than both oil
> and coal per unit volume. Those machines and equipment might perform
> relatively poorly when converted to LNG and may prove to be not cost
> effective at all. LNG may have to be priced a lot lower than most
> producers would accept in order to be able to encourage existing
> oil/coal users to convert into LNG.
>
> Over-supply might as well become the norm in the near future than
> supply shortages for LNG.

Apr 08 07:57 PM

[Old Trader:]

Ferdinand,

Are you suggesting that Russia has NOT used natural gas supply as a poltical "weapon"? Perhaps you've forgotten about that little affair where Gazprom cut the gas to the Ukrainian pipelines that transport NG to Europe? Hence the interest in a "southern route" pipeline from the "Stans" to Turkey.


On Apr 08 09:56 AM Ferdinand E. Banks wrote:

> This is a an interesting and useful article.
>
> But with respect to the comments, nobody is going to convince me
> that LNG makes more sense for Western Europe than Russian pipeline
> gas. I'm too smart to believe propaganda like that - especially propaganda
> containing nutty terminology like 'Russian stranglehold'. And I suspect
> that Russian pipeline gas will also have an important market in China.
>
>
> As for the global supply of gas, some observers think that there
> is not as much as a few so-called experts think, although Russia,
> Iran and Qatar are well supplied. Perhaps I should also mention that
> I refereed a paper once in which the author proposed an OPEC-type
> arrangement for gas. Maybe that doesn't make sense today, but what
> about in ten years?

Apr 08 08:02 PM

[bcncv:]

I agree (or at least can't refute) that natural gas is well supplied to the US market. This doesn't apply to Europe though. Last I checked, Russia supplied roughly a third of Europe's energy through natural gas pipelines. Several things are happening at once there.

First, Russia keeps shutting off supplies to various countries and tripling the price to others. Second, I've seen several reports that Russia has actually contracted to provide 20-30% more than their gas fields can actually deliver over the next several years. Exact data points are hard to find, but I've seen enough info to make me suspicious of Russian capabilities. Third, most of the pipeline infrastructure that connects Europe to it's natural gas hasn't been maintained since the 1980's.

This all points to LNG and nuclear becoming VERY valuable to Europe over the next several years.

Apr 09 06:22 PM

[Conan the B...:]

The Nat gas Cartel is old news, Iran, Qatar and Russia formed their alliance earlier this year. They have as yet to make a price announcement.

I believe they Control some 60% of the World's NG production.

Its not a matter of IF, but rather when their consortium decides to step forward. They may wait until signs of World Economic growth starts to be felt.

When Europe started exploring for sources of nonRussian NG, Russia started looking for ways to remain in the "loop".

Apr 11 04:51 AM

[Lara Crigger:]

Interesting article! I wonder: How do you think the LNG market will be affected long-term by the recent deal Gazprom signed with Shell to send its LNG to California? (We wrote about it recently here: www.hardassetsinvestor...)

On the one hand, like you said, the NG market's already suffering from oversupply and low demand, and the volumes involved in the deal about here are pretty miniscule. But on the other hand, the U.S. does consume a major chunk of global NG, and now Gazprom's got a foot in the door in the U.S. It'll be interesting to see where this goes in the future...

Apr 13 04:42 PM