Will the U.S. become a net exporter of Liquefied Natural Gas (LNG)? This is the question I posed in my first article published by Seeking Alpha in December 2010. It appears from the latest special report released by the IEA titled, “Are We Entering the Golden Age of Natural Gas?” my thesis could be coming to fruition.
Please review the following excerpt from a press release recently published by the IEA regarding the scenario for the Golden Age of Natural Gas.
As supply and demand factors increasingly point to a future in which natural gas plays a greater role in the global energy mix, the IEA on Monday released a special report exploring the potential for a “golden age” of gas. The new report, part of the World Energy Outlook 2011 series, examines the key factors that could result in a more prominent role for natural gas in the global energy mix, and the implications for other fuels, energy security and climate change.
The report, titled, “Are We Entering a Golden Age of Gas?” presents a scenario in which global use of gas rises by more than 50% from 2010 levels and accounts for more than a quarter of global energy demand by 2035. However, the report also strikes a cautious note on the climate benefits of such an expansion, noting that an increased share of gas in the global energy mix is far from enough on its own to put the world on a carbon emissions path consistent with a global temperature rise of no more than 2 degrees Celsius.
Speaking at the launch of the report in London, IEA Executive Director Nobuo Tanaka said,
"We have seen remarkable developments in natural gas markets in recent months. There is a strong potential for gas to take on a larger role, but also for the global gas market to become more diversified and therefore improve energy security.” Mr. Tanaka added that “while natural gas is the ‘cleanest’ fossil fuel, it is still a fossil fuel. Its increased use could muscle out low-carbon fuels, such as renewables and nuclear – particularly in the wake of the incident at Fukushima and the likelihood of a reduced role for nuclear in some countries. An expansion of gas use alone is no panacea for climate change," he said.
Golden Age of Gas Scenario
Recent developments have created considerable opportunities for greater future use of natural gas globally, depending on the interaction between economic and environmental factors and policy interventions in the market. This report presents an illustrative “high gas scenario” – the Golden Age of Gas Scenario – which incorporates a combination of new factors that could support a more positive future outlook for gas. These include ample availability of gas (much of it unconventional), which lowers average gas prices, implementation by China of an ambitious policy for gas use, lower growth of nuclear power and more use of natural gas in road-transport.
In the scenario, China’s natural gas demand alone rises from about the level of Germany in 2010 to match that of the entire EU in 2035. To meet the growth in demand, by 2035 annual gas production must increase by 1.8 tcm, about three times the current production of Russia. Conventional natural gas will continue to make up the greater part of global production, but unconventional gas becomes increasingly important, meeting more than 40% of the increase in demand.
Global natural gas resources are vast, widely dispersed geographically and can help improve energy security. All major geographical regions have recoverable natural gas resources equal to at least 75 years of current consumption. However, timely and successful development of these resources depends on a complex set of factors, including government policy choices, technological capability and market conditions.
Is increasing U.S. exports of LNG feasible?
The Department of Energy is responsible for regulating the import/export of natural gas. Section 3 of the Natural Gas Act of 1938 requires anyone who wants to import or export natural gas, including liquefied natural gas from or to a foreign country, must first obtain an authorization from the Department of Energy. The Office of Natural Gas Regulatory Activities is responsible for these authorizations. The import/export authorizations are necessary for anyone who wants to market, trade, or use foreign natural gas.
The price of natural gas in the U.S. is less than $4.90 per million British thermal units (mBtu). The price of natural gas in Asia is $10 per mBtu. This is an opportunity for major profits. The problem is the natural gas market is for the most part local. It is not as easy to ship natural gas as it is to ship oil. Natural gas must be supercooled so it liquefies. Cheniere Partners (NYSEMKT:CQP) received permission from the U.S. Department of Energy to export LNG produced in North America from its Sabine Pass terminal. The company had already received permission to re-export imported LNG. Cheniere Partners announced a memorandum of understanding that was signed with a Chinese company, ENN Energy Trading Co., to provide the company with 1.5 million metric tons annually of LNG produced at Sabine Pass. Additionally, Cheniere Partners signed a memorandum of agreement with Morgan Stanley Capital Group Inc. The agreement would allow Morgan Stanley to import or export up to 1.7 million metric tons annually from Sabine Pass. Currently, there is one other North American LNG export facility. The U.S. has 10 LNG import terminals where the owners are petitioning the U.S. government for export licenses to join the race to export LNG. We could see the ramp up of export facilities in the near future.
This bodes well for the U.S. oil and gas industry and companies like Chesapeake Energy, Corp (NYSE:CHK), Southwestern Energy (NYSE:SWN), Exxon Mobil (NYSE:XOM), Petrohawk Energy (NYSE:HK), EOG Resources, Inc. (NYSE:EOG), Halliburton Co. (NYSE:HAL), SandRidge Energy Inc. (NYSE:SD), Schlumberger (NYSE:SLB), Devon Energy Corporation (NYSE:DVN), McMoRan Exploration Co. (NYSE:MMR), Weatherford International Ltd. (NYSE:WFT), and Apache Corporation (NYSE:APA), to name a few. All these companies are heavily involved and industry leaders regarding the exploration, production, servicing and distribution of U.S. oil and natural gas conventional and unconventional plays.
Cheniere Energy Partners, L.P. - Through its subsidiary, Sabine Pass LNG, L.P., owns and operates the Sabine Pass liquid natural gas receiving terminal in western Cameron Parish, Louisiana on the Sabine Pass Channel.
Cheniere Energy, Inc. - Through its subsidiaries, engages in the development, construction, ownership and operation of onshore liquefied natural gas receiving terminals and natural gas pipelines in the Gulf Coast of the United States.
Chesapeake Energy Corporation - Together with its subsidiaries, produces natural gas in the United States.
Southwestern Energy Company - An independent energy company, engages in the exploration, development, and production of natural gas and crude oil in the United States.
Exxon Mobil Corporation - Engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas and petroleum products.
Petrohawk Energy Corporation - Engages in the exploration, development and production of oil and natural gas properties in the United States.
EOG Resources, Inc. - Together with its subsidiaries, engages in the exploration, development, production and marketing of natural gas and crude oil primarily in the United States, Canada, the Republic of Trinidad, Tobago, the United Kingdom and the People's Republic of China.
Halliburton Company - Provides various products and services to the energy industry for the exploration, development and production of oil and natural gas worldwide.
SandRidge Energy, Inc. - Together with its subsidiaries, operates as an independent natural gas and oil company in the United States.
Schlumberger Limited - The company and its subsidiaries supply technology, integrated project management and information solutions to the oil and gas industry worldwide.
Devon Energy Corporation - Together with its subsidiaries, engages in the acquisition, exploration, development and production of natural gas and oil in the United States and Canada.
McMoRan Exploration Co. - Through its subsidiary, McMoRan Oil & Gas LLC, engages in the exploration, development and production of oil and natural gas offshore in the Gulf of Mexico and onshore in the Gulf Coast area of the United States.
Weatherford International Ltd. - Provides equipment and services used in the drilling, evaluation, completion, production and intervention of oil and natural gas wells to independent oil and natural gas producing companies worldwide.
Apache Corporation - Together with its subsidiaries, engages in the exploration, development, and production of natural gas, crude oil, and natural gas liquids.
The fact that the U.S. may be on its way to becoming a significant exporter of natural gas rather than a significant importer is amazing and seems inevitable. If shale gas development and extraction continues on its current pace this will become a lucrative new business. The U.S. could soon be competing to supply the world with natural gas. If the U.S. exported just a small percentage of its natural gas, it would become one of the largest exporters of LNG in the world. The U.S. can compete with any country regarding natural gas costs and reserves. China and Great Britain have become net importers rather than net exporters of natural gas along with a number of other countries. The global demand for LNG is evident. The U.S. supply is abundant and cost effective. If U.S. energy companies execute on current plans to increase export capabilities the price of natural gas should soar. This opportunity is too great and too obvious to be ignored. I'm betting energy companies won't let this one slip through their grasp.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LNG, SWN, CHK, XOM, HK, EOG, HAL, SDSL.PK, DVN, MMR, WFT, APA, CQP over the next 72 hours.
Additional disclosure: Information was gathered from CNBC, Yahoo Finance and respective company websites. Based on the current market conditions I would suggest scaling in to any position to reduce risk. I believe all these stocks are currently undervalued and provide significant opportunities for long term investors. Please use this information as a starting point for your own due diligence.