Natural Gas: An Energy Resource Whose Time Has Come

I am a long term fan of Natural Gas (nat gas) and have posted pro-nat gas articles on this website in the past. The price of nat gas is weak now due to its "junk energy" status during an economic downturn. It is highly leveraged to the economy and does very well in a strong economy and very poorly in a weak economy. This is due to its current primary use as an industrial energy source, its seasonal use for building heating in North America and its status as an "off-peak" electricity source.

If (when) nat gas becomes a primary transportation fuel source alongside gasoline and diesel, its utility and value will soar. I think that time is coming soon. The easiest way to achieve a significant global reduction in green-house gas is by a conversion of transportation systems from gasoline to nat gas and electric power from coal and oil to nat gas. This hasn't happened in the past for two reasons: (1) lack of distribution infrastructure (i.e. nat gas fuel stations on every corner); and (2) perception of uneven nat gas distribution across the geography (nat gas is expensive to transport other than through a pipeline due to its low density as a gas). A third issue is the conversion of vehicles from gasoline to nat gas powered, but this is a manageable economic issue that can be addressed with tax policy, and is not a technology issue.

I see the Obama administration addressing the greenhouse gas problem through policies that favor nat gas production, distribution and use. He will announce the foundation of those policies today (Tuesday). Hopefully more detail is close at hand once we can get past the health care debate. Nat Gas is a good solution to provide energy independence and a cleaner environment. It provides a technology bridge to developing renewable energy sources like solar, wind and hydrogen fuel cells. The transition will happen and should be the cornerstone of every portfolio. It has Boone Pickens as its primary cheerleader and policy financier. He is a person who wants to leave the world with a legacy of cleaner energy.

The nat gas ETF, UNG is flawed as an investment vehicle, but is the only pure play on nat gas pricing (using nat gas futures as its asset base). The premium on the ETF due to a moratorium on adding futures to the ETF is down from 20% to 5% in the past two months. That premium is manageable and makes UNG once again a decent way to play nat gas. North America energy producers are the other way to play nat gas: CHK, XTO, LINE, PWE, APA, PVX, MRO, PGH are some of the stocks and MLPs one can use to gain exposure to nat gas. The actual producers also issue very attractive dividends to make the wait worthwhile.

Comments

[zorro6204:]

I don't dispute your general conclusions, but I'm extremely skeptical regarding the timing. This country does not seem to handle macro issues like this until there's some kind of crisis, and in the case of oil, apparently not even then (it's been four decades since the OPEC gas lines). Boone Pickens added a little momentum to the idea, but perhaps his failed predictions and losses have cost him credibility, and the plan along with it.

There's also the structural problem to consider. If cars are refueled by a home gas line or electrical socket (partially gas generated), then what happens to the hundreds of thousands of gas stations and the associated jobs? It's like making car insurance pay at the pump no fault. Great idea, very efficient, very logical. Forget it, the massive number of people employed in the insurance profession and all their office space being emptied would be too great of an economic shock. There will be great resistance to any kind of systemic change like that.

Sep 23 04:19 AM

[Gigem77:]

GAZ and HNU.TO are also natgas etfs. Most of the natgas E&P companies do NOT pay good dividends. Companies like APA and LINE have significant oil production that has helped weather this weak period for natgas prices. LINE operates like a royalty trust. The royalty trusts pay decent dividends and the Canadian royalty trusts (PGH, PWE, ERF etc) have some tax issues that must be considered.

If you like natgas as a transportation fuel, then consider CLNE, Boone Pickens entry into the space.

Sep 23 05:57 AM

[bartpr:]

the investment in expensive refueling station that could safely store and dispense ng would be massive. if it is not delivered to the stations by truck, a questionable process, it would require massive underground piping to handle the volumes to individual stations. existing pipelines could not handle the additional volumes during peak winter usage times.

it will nver happen.

Sep 23 06:37 AM

[CAJUNGATOR:]

the "PROS" of NG far outweigh the "CONS". One of these days I hope those dimwits in D.C. figure this one out. check out those MLP's. some safely pay great dividends. good luck out there.

Sep 23 08:30 AM

[Decoy:]

A great article but you left out ECA as a big player in Nat. Gas.

Sep 23 08:57 AM

[Forecaster ...:]

Zorro - Not to mention the dislocation of unemployed military contractors when we cut back on defending the Persian Gulf.

There's a $2 ++ a gallon taxpayer subsidy of gasoline built into the defense budget. Talk about resisting systemic change -- you ain't seen nothing yet.

God bless T. Boone.


On Sep 23 04:19 AM zorro6204 wrote:

> Forget it,
> the massive number of people employed in the insurance profession
> and all their office space being emptied would be too great of an
> economic shock. There will be great resistance to any kind of systemic
> change like that.

Sep 23 09:09 AM

[Norman:]

PVX has a foreign tax too. I think electric cars would do better even though no addresses the cost of electicity transmission costs to your house into the figures

Sep 23 09:11 AM

[bradiop:]

While there are a number of hurdles for nat gas to become a fuel for everyday transportation it gets much easier if it is focused on some special uses; i.e. long haul trucks on Interstates (only need few refueling stations) short haul trucks where truck each night return to some local depot (again only need few refueling stations). (i.e. the Pickens Plan)

Sep 23 09:29 AM

[learnmoney:]

Look to Europe and how we use NG..............

Sep 23 09:46 AM

[a. palmer jr.:]

About the infrastructure: most people have natural gas piped right to their homes. Why not set up a connection to gas up your car right at home and cut out the filling station except for long trips? They're going to do that with electric cars, why not with natural gas? Whatever it takes to get us off middle east oil, I'm for it!

Sep 23 10:03 AM

[jerrydd:]

NG will only fuel cars by way of cogen powerplants charging EV's, PHEV's. They will go 3-6x's as far on the same NG as using it in a car.

The real future uses will mostly be replacing coal plants and peak electric power to keep power flowing when RE isn't .supplying it.

In transport besides EV's, NG will replace diesel/gas in Semi's, trucks where it is a no brainer.

Another is to make gasoline, diesel, petrochemicals plus electricity by way of the FT, other processes.

Luckily we seem to have plenty of it for decades that with RE like wind, solar CSP and PV once price gets better, tidal/river kinetic hydro, biomass/FT/pellets and maybe nukes if they bring down the cost, is our energy future.

As supply is good and easy to increase plus imports of it I don't see it getting much over $6 so not that good as a investment but great for our economy.

Sep 23 11:01 AM

[grbn:]

nat gas is a carbon based fuel and is therefore unacceptable to Obama and the green weenies. Govt policies discourage conversion of vehicles to nat gas by imposing ridiculously high licensing fees. I'm not sure, but I believe, nat gas is not that advantageous for utility conversion concerning the potential carbon tax penalties. Nat gas makes perfect sense in many applications but the govt. doesn't consider what makes sense. For nat gas to succeed, watch for whether we stop the global warming nonsense, look for specific, detailed endorsement in government policies and law, watch for wide spread public transportation and co. vehicle fleets being converted, and the opening of local nat gas sources for private vehicles.

Sep 23 11:11 AM

[GMiki1:]

Nat gas wells deplete quickly so we may not have the supply we think. I'm a nat gas bull and hold PWE and UNG.

Sep 23 11:39 AM

[Ferdinand E...:]

Some people are going to make a bit of money if gas is allowed to do what this author and some of the commentators think that it can do, but I don't see the country gaining as a result - definitely not in the long run, and probably not in the short run.

Sep 23 11:55 AM

[mr. verdi:]

HNU.TO. Man, what a way to go. Even on the stinky pinky sheets as hnuzf.pk . Got in before the reverse and this is way cool ........so far. Verify for yourself. A double rated ETF on its move and boy does it perform when NG is goin up...whew like blow the doors off. GAZ is cool to, but these are mobetta. jjv

Sep 23 01:43 PM

[436813:]

Brian,
the best thing that could happen for NG was rejected by congress - cutting capacity of Coal based powerplants in the nation. NG is not a good fuel for cars for many reasons, and infrastructure is 1 and very big one of them, its volume and high pressure requirements make cars into bombs on wheels - big #2.
Stationary objects such as homes and powerplants are much better suited for use of NG. Unfortunatelu our leaders voted in favor of coal. How dirty of them. I personally think that combination of solar based power/heating combined with NG based generator for high/night power requirements is best solution for urban areas with established gas infrastructure.

Sep 23 02:28 PM

[Laughing:]

There is no plan to stop using regular gasoline and switch the NG, we will have both. This is a win win scenerio for the consumer since you will be able to choose what type of car you want, NG or gasoline, and buy it. Its called competition and the last time I checked we were still, in theory, a capitalistic society. Gasoline is pretty much a monopoly, even though most dont look at it that way.

Sep 23 06:09 PM

[A Barrel Full:]

In the medium term, DME (Dimethyl Ether) might be the answer.

It is similar to propane, but can be used in diesel engines. Currently it is made from Methanol, but a number of companies are working on direct manufacture from Natural Gas. If they manage, then it is a game changer.

It doesn't need the high pressures of natural gas, and performs better than the fuel it replaces. Plus it leapfrogs the licencing issues.

Sep 24 02:37 AM

[Joe Shareho...:]

UNG seems safer than the stock market now. I moved my money there, it's not only a hedge against stock market woes which i expect soon, but it's also at it's 52 week low and we're heading into winter heating months.

Sep 24 08:57 AM

[Don Leo:]

France has 56 Nuclear Reactors that produce 87.5% of its electrical needs. They have 3 basic designs that were constructed in the 70s and 80s that resuse the spent fuel. France exports roughly 18% of electrical output. Why is the USA even bothering to consider other systems?

Sep 24 10:45 AM

[David Zanoni:]

Natural gas already has pipelines running through cities to homes and businesses - it's just a matter of adding to the existing infrastructure.


On Sep 23 06:37 AM bartpr wrote:

> the investment in expensive refueling station that could safely store
> and dispense ng would be massive. if it is not delivered to the
> stations by truck, a questionable process, it would require massive
> underground piping to handle the volumes to individual stations.
> existing pipelines could not handle the additional volumes during
> peak winter usage times.
>
> it will nver happen.

Sep 24 09:48 PM

[Brian McMorris:]

Norman, the Canroys all withhold a 15% tax on distributions to Americans, but the tax can be deducted directly on the IRS 1040 under "Foreign Tax Withheld". The bigger question for the Canroys is that they are slated to lose their MLP / Royalty Trust status and be taxed as corporations. This tax will hurt their performance, eventually. But they are all anticipating the change (currently for 2011) and are stockpiling tax losses to offset the future profits. The oil / gas industry has lots of ways to generate loss including depreciation of production equipment and well depletion credits.

Sep 25 05:48 PM

[Brian McMorris:]

Any opinions about AMJ?

Sep 25 05:59 PM

[User 474447:]

There are many scare mongers here concerned about the pressure requirements turning cars into mobile bombs etc.
An experiment in Indian cities of Delhi (most polluted city until a few years ago) and Mumbai (fairly highly polluted) - led the Govt to mandate that all Taxis and auto rickshaws (scooters turned into three wheel short distance taxis) should be run only on compressed natural gas. Today, the pollution levels in both these cities has dropped like a rock given the will power of the Govt to mandate such a change despite lobbies to protect gasoline (aka petrol) as the mainstay of the economy, and political opposition to make such a mandate. Today private vehicles are being produced to support CNG as an alternate fuel.
The US Govt needs to have the gumption to make such changes instead of catering to the lobbies.
NG can only come out into the limelight if a major game changing effort comes under way under a solid mandate.

Sep 28 12:50 AM

[Brian McMorris:]

The scare tactics don't fly from a physics perspective. If the energy contained in a tank of natural gas (good for 400 miles of travel) is the same as that contained in a tank of gasoline, the danger is no greater. If anything, energy in a gas form rather than liquid is less dangerous because if the tank is ruptured, it disperses quickly and is diluted by air. The "bombs on wheels" argument is completely ignorant and not supported by science.

The other argument that should be de-bunked is that existing natural gas pipelines into suburbs and homes could be used to refuel vehicles. The existing pipes are sized for the existing demand for home / building heating. They would not have the capacity for the additional demand of fueling vehicles. The same is true of electricity should totally battery driven vehicles become a reality. But it would be attractive to be able to fuel your vehicle at home, if cities / suburbs could have their energy delivery capacity expanded. Sounds like a great public works project for Federal stimulus

Sep 28 10:48 AM

[oilsands:]

Brian, your comment to Norman is subject to misinterpretation.
The 15% tax withheld turns into a tax credit, i.e., it offsets US taxes dollar for dollar. The 15% credit is not a deduction, but a tax credit. I have owned Can Royals for years and to my knowledge, that is the only tax which affects Americans as of this time. The whole issue is subject to re-negogiation at any time, just as are any taxes. It is also an investment risk. If you expect the price of oil to permanently skyrocket in four to six years, as I do, then the risk seems worthwhile.

A. Palmer is right, "whatever it takes to get us off middle eastern oil. "
Worrying about relative costs of alternative energies is silly when we are bankrupting ourselves buying foreign oil. Besides, as earlier commentators have mentioned, the subsidy on oil in both tax write-offs and defense is probably over $3.50 per gallon. AND we have abundant coal and natural gas. The clean fuel concern can be solved by coal gasification, which seems to be totally overlooked. We need to convert to renewable energies, but the latter would solve a lot of interim problems. Germany has been using coal gasification for some time.

Sep 28 11:47 PM