There will be winners and losers in all parts of the Energy sector due to the development of Fracking. What we know is there is a ton of money to be made. Where, when and how are the great questions. This will enlighten the when and how, I just can't put my finger on the who as of today, but I will share who I like and why.
The price for Natural Gas in America is low because production exceeds the current market consumption. The world market price is much higher as the demand outside our borders is consuming at a higher rate, with a projected growth increase. The average cost for LNG in the U.S. today is between $2 - 3 dollars per million cubic feet [MCF]. Japanese utilities, meanwhile, are paying between $15 - 16 dollars mcf for gas from the Persian Gulf. There is opportunity to sell on the world market and make a huge profit, however, there is a cost to Americans that will affect all Americans and offend some. When America completes the export terminals and begins to supply to the world, the cost to the world will decrease as the supply increases. Costs to Americans will go up because suppliers can sell to overseas markets for larger profits. The affect on Americans will encourage legislation to force artificially lower prices here in America. The only way to keep low prices in America is to prevent the sale to the world markets, which would retain the glut of LNG in America. I do not believe this will happen.
The pipeline infrastructure to move Liquid Natural Gas [LNG] across America is underdeveloped at this time (2013) to provide the continuous distribution. There is a fleet of trucks that can move some LNG, but there is a cost factor. Railcars can move the LNG cheaper than trucks, but the distribution challenges are more limiting. The solution right now is a combination of all three modes to distribute LNG from ground to refinement to the consumer. Over time, which is happening now, there will be an increase in pipelines moving LNG that will encourage mergers and takeovers to gain controlling interests of key facilities and pipeline networks. We currently have one company selling LNG to Mexico and it is continuing to expand this export by doubling the current 3.5 billion cubic feet [BCF] to 7.0 bcf in the next few years. And some companies will build export terminals to ship LNG overseas.
Cheniere Energy (LNG) has the only approved license to export to countries that are not members of a free trade agreement. The license allows them to export at a rate of about 2 billion cubic feet per day, or about 3% of the total current U.S. production. Cheniere Energy is also the company with the contract in Mexico.
Exxon (XOM) would prosper from no exports of LNG because it has a new ethylene production facility that will be coming on line in 2016. This new facility, which will use natural gas liquids as a feedstock for building an essential building block for most plastics, is expected to produce about 1.5 million tons per year of ethylene, which adds up to about 666 million cubic feet per day of natural gas equivalent.
Exxon would also prosper from exports because it has proposed an LNG export terminal for the Sabine Pass in Texas, that could move 2.6 billion cubic feet per day. So while the company is publicly advocating for natural gas exports, it does have a hedging strategy in place in the form of its chemical production facility just in case natural gas exports never come to fruition.
Dow Chemical (DOW) is currently benefiting from the LNG surplus and lower prices, and would continue to benefit from not exporting that support its chemical manufacturing plants.
Natural Gas Power Plants are benefiting from lower energy costs today and would continue to benefit because cost of LNG would remain low from the over production and supply on hand. If exports begin, the cost will go up in American and our electric bills will go up also.
Currently there are 12 ocean terminals for import of LNG into the U.S. There are seven proposed export terminals. And here is an example of the business and contracts it has signed related to the large export of LNG the U.S. will conduct in the near future.
1. Sempra Energy (SRE) gained approval from the U.S. Department of Energy to export LNG through Cameron LNG operations at the Calcasieu Channel in Hackberry, LA. The permit will allow up to 1.7 bcf per day.
2. Cheniere Energy owned by Corpus Christie Liquefaction began in 2011 to refit a terminal at La Quinta Channel near Corpus Christi, Texas, to export LNG and has submitted a pre-filing with the National Environmental Policy Act. It plans to begin operations in 2018. In March 2013, Centrica, a UK energy company, let a contract to pay for 89 bcf of gas annually beginning in 2018 for 20 years. Cheniere Energy also manages Sabine Pass LNG in Cameron Parish, Louisiana.
3. Dominion (D) owns Cove Point in Lusby, MD and received authorization in October, 2011, from the Department of Energy to enter into contracts to export liquefied natural gas. In April 2013, Dominion Cove Point signed three x 20-year terminal service agreements with 1) Pacific Summit Energy, LLC, a U.S. affiliate of Japanese trading company; 2) Sumitomo Corporation; and 3) GAIL Global (USA) LNG LLC, a U.S. affiliate of GAIL (India) Ltd. The total of the three contracts equate to half of the marketed capacity. Sumitomo serves Tokyo Gas Co. and Kansai Electric Power Co. Inc., in Japan. GAIL is the largest natural gas processing and distributing company in India.
4. Conoco Phillips (COP) owns 2/3s and DOW Chemicals owns the remaining third of the terminal in Freeport, Texas. BP signed a 20-year contract for 4.4 million tons a year starting in 2017, the same as Osaka Gas Co and Chubu Electric Power Co of Japan.
These are a few examples of the massive business growth being unleashed by the Fracking advances. There is enough uncertainty to also appreciate that there are few sure-fire winners in the market at this time.
There will be mergers and takeovers among these and other companies in the drilling and ownership of sites, transportation hubs and lines of LNG, the lucrative contracts and ports will become prizes billions of dollars will change hands for, and create many millionaires and billionaires. The winners will be those companies with cash and the ability to move quickly to take advantage of opportunities. For the investors, hedging your bets with large companies is a plus. I would also look for agile and fast-moving management teams that can quickly take advantage of new opportunities.
Secondly, I will also recommend the companies behind the scenes that build the infrastructure, transport of the goods and process NG to LNG. Regardless the market price, these tasks must be done and they will charge cost, plus a profit.
Third, currently, there are not enough ships to handle the growing demand to transport LNG around the world. More ships are on order through several ship builders, which also present an investment opportunity. A single ship can transport about 34 million gallons of LNG. There may be dozens of additional ships being built for years to come. Different sizes to handle different ports and legs of transport.
Additional disclosure: I do own stock in XOM, and considering investing in COP, DOW, BP and investments not listed here. Information for this report came from various sources including: general news outlets, Sourcewatch.com, The Street, MotleyFool.com and Freeporting.com