ktaehee's  Instablog

natural gas may deplete in near future. That was when all the natural

gas company stocks like CHK was doing extremely well.

What happened at that time is that US government constructed

LNG importing ports. I posted an article around 2006 which can show

how exciting people were about importing LNG from overseas.

http://intelligencepress.com/features/lng/

A total of 17 proposed LNG import terminals in North America, with 24.2 Bcf/d of peak sendout capacity (and expansion plans for another 5 Bcf/d of peak sendout), have been approved by government regulators (including two offshore Florida pipelines to proposed LNG terminals in the Bahamas):

• Irving Oil's Canaport LNG terminal in St. John, NB, was approved by Canadian authorities;
• Anadarko Petroleum's Bear Head LNG terminal in Cape Breton Island, NS, also was approved in Canada;
• Hess LNG and Poten & Partners' Weaver's Cove LNG project in Fall River, MA, was approved by FERC;
• AES Corp.'s Ocean Express Pipeline was granted a certificate by FERC in 2004 but its Ocean Cay LNG terminal has not been approved in the Bahamas;
• Suez Energy North America's Calypso Freeport Bahamas pipeline was granted a certificate by FERC but its LNG port in the Bahamas has not received a permit and the company is now expected to file plans with the Coast Guard for an offshore Florida port instead;
• Corpus Christi LNG LP's (Cheniere and Sherwin Alumina affiliate BPU LLC) onshore terminal in Corpus Christi was approved by FERC in April 2005;
• Cheniere LNG's Sabine Pass terminal in Sabine Pass, LA, was approved by FERC in March 2005;
• Occidental Petroleum's Ingleside Energy Center in Ingleside, TX, was approved by FERC in July 2005;
• ExxonMobil's Golden Pass project in Sabine Pass, TX, was approved by FERC in July 2005;
• Freeport LNG Development's terminal in Freeport, TX, was approved by FERC in June 2004;
• Sempra Energy's Cameron LNG terminal in Hackberry, LA, was approved by FERC in September 2003;
• ExxonMobil's Vista del Sol LNG terminal and pipeline were approved by FERC in June 2005;
• Chevron's Port Pelican LNG port was approved by the Maritime Administration (MARAD);
• Shell's Gulf Landing LNG port also was approved by MARAD in February 2005;
• The Altamira LNG terminal proposed by Shell, Total and Mitsui, in Altamira, Mexico on the Gulf Coast was approved by Mexican authorities;
• Sempra Energy and Shell's Energy Costa Azul LNG terminal in Ensenada, Baja California Norte, Mexico, was approved; and
• Chevron's Terminal GNL Mar Adentro project offshore Tijuana, Mexico, received final authorization from Mexican authorities in January 2005.

In addition to the approved terminals, there are another 25 projects, with 27.75 Bcf/d of proposed peak sendout, on file with regulators in Canada, the United States and Mexico. Another 21 projects, with 17.3 Bcf/d of expected peak sendout, are in the planning stages. And at least 11 LNG projects have been canceled so far.

It's actually funny to imagine US importing LNG nowadays. with $2.30 MMBTU right now.

However, it's also funny that same commodity is being traded some part on the earth for around $15 MMBTU at the moment.

http://au.ibtimes.com/articles/244268/20111107/asian-lng-prices-nary-movement-japan-south.htm

This article is not too long ago, saying Korea and Japan is importing at

$17 which was around 5X of LNG price in united states.

CEO of CHK was making a move in Asia to encourage them to invest in the company for that exact reason.

http://www.businessweek.com/news/2012-03-11/chesapeake-ceo-courts-asians-for-100-billion-resource-energy

Given these information :

So, here are what US gas companies can do get out of this hole

1. Cut the production level

If it was about 1 year ago when shale didn't come to play, yes this

could have been true. But with $106 / barrel, Shale makes a lot of

money for the company at the moment, so they can't stop drilling

Shale ground. However, this shale produces enormous amount of gas

in the process. and if you try to slow down on Shale production,

you will see what happens to your company like QEP had few days ago

(on March 12th, QEP said they will lower the spending on their shale

investment, and stock went down nearly 5%)

This game is almost turning into prisoner's dilemma right now.

If you cut the production level, LNG price may go up a little to benefit

the whole industry, but you will suffer a big loss. So only thing that is

good for whole industry is that everyone takes a production cut, but

this type of cooperation is highly unlikely.

2. Come up with new source of LNG usage

CHK announced few days ago that they will invest in developing LNG

car. Great idea. But, this idea requires a lot of infrastructure to be

tweaked. like installing LNG charging stations. Moreover, LNG car is

have a vulnerability in leaking fuel.

When you look at the old car, you can see the fuel leak sometimes.

If it's gasoline, it's not much of a big deal, but if it's LNG is leaking,

that is a serious problem. Would it be possible to create a car which

doesn't have any leaking problem? Well, car makers are in business for very very long time until now, and they still couldn't fix it yet.

Even if this idea is implimented, how long is going to take?

3. Export them !

I think this idea is most viable option out of 3.

As you see, exporting LNG also requires infrastructure.

Source : wikipedia

as you see treatment process is required regardless if you export or

not, so you need a refrigeration facility at the port to export LNG.

and LNG transportation ships.

It's cost is estimated around 2-3 billion dollars. Sounds like a lot of

investment, but CHK alone, have 100 billion dollars asset, and this idea

is something all the natural gas industry can pitch in and share the

benefit of extra demand.

Then why not doing this?

It's because of the fear that fossils fuel resources are scarce.

Government is considering if this course of action would be the

best for the US as whole. Once this facility is installed, American

people will pay more for the fuel for sure for the benefit of foreign

countries, and LNG company's shareholders. So implimentation of this

project will face severe challenges from Government, environmentalist,
and socilists. So, this would be an ideal course of action for the

industry, but it won't be the easy one.

Final option - Do nothing

A lot of analysts are calling 2Q2012 as the bottom of LNG price.

Reason being is that there will be a demand for preparing for the

winter. However, who can guarantee it will be cold one?

http://www.accuweather.com/en/weather-news/combination-of-factors-could-m/36990

fortunately, US is expecting to have frigid winter for next 3 years.

and it will boosts the demand for the LNG, but major problem here

is not only the weak supply, but it's explosive supply increase.

so yes, cold winter will help, but it won't let the problem go away.

Reason that I'm writing this article is that, to suggest that there is a

way out from this hole. It will be a difficult one, but there is a way.

Even though I see more deep drops in LNG price in near future, but if

price drops further it will be at the point where the price no longer

sustainable. This will accelerate the process for industry to seek for a

solution. and I believe it would be the ones that I'm suggesting above.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I have a long position in CHK and QEO in my client's portfolio