The Global Race To Secure Natural Gas In Emerging Markets

Includes: CHK, ECA, XOM
by: Michael Ambrozewicz

The global race to get LNG into Asian markets has become an ambitious goal for three nations; Canada, Russia, and the USA. However, the U.S. seems to have emasculated itself of its vigor to grasp the current level of global competition and infrastructure related to natural gas. Experience has shown that opening up the borders and increasing vigorous competition spurs innovation, accompanying an increase in productivity. This results in greater economic efficiency and generally higher quality products at lower prices.

This year, Vladimir Putin of Russia moved quickly to liberalize LNG exports by stating that Russia will press ahead with opening up its exports of liquefied natural gas in a move to meet the growing demand from Asian-Pacific markets. Currently, Russia has only one LNG export terminal operating in Russia, which is the 10 million tons per year Sakhalin-2 project built by Shell (ADR). Two LNG cargos arrived in Japan's Tokyo Bay in April of 2009, securing Russia's strong foothold in Asia.

According to the U.S. Energy Information Administration, Russia now has more shale oil and natural gas than the United States, but doesn't compare to the United States in technological capabilities to drill it. Russian President Putin urged Russian energy producers to rise to the challenge of a changing market, as the U.S. increases output of shale gas. In the future, a gas pipeline will be laid parallel to the oil pipeline towards the Pacific and China.

In June 2012, Bloomberg reported that Putin was looking to Exxon's (NYSE:XOM) fracking technology in a venture with the Kremlin-run oil company Rosneft. ExxonMobil would provide skilled contractors, engineers, and designers for the Far East LNG project. Putin surprised the Exxon executives by saying that the investment is so large that "It's scary to utter such figures." Putin stated that the potential investment will be as high as 500 billion. However, Exxon officials quickly assessed that the figure will likely be "tens of billions of dollars." The comedy of errors gets even better for Putin and the Russian people. In 2006, after Royal Dutch Shell spent a decade, and more than 20 billion of its own money to build the Sakhalin offshore development, they were forced by Putin to sell their stake to Gazprom, a state run oil company, at a huge discount. And, the chief executive of British Petroleum, Bob Dudley, was apparently forced out of Russia after a falling out with the oligarchs. Even though Bob Dudley feels snubbed by the Kremlin and the Exxon deal, he will at least have a restful sleep - unlike the executives from Exxon, who will be sleeping with one eye open.

Vladimir Putin is an oil baron reportedly worth 70 billion dollars, making him the richest man on Earth. He is keenly aware that the United States is still operating under the anti-free trade policies of a bygone era of artificial scarcity. He is considered the most resource-driven leader in the world today. In 2003, Putin charged a privately-held producer, Yukos Oil, with a $27 billion tax bill that bankrupted the company. The chairman of Yukos Oil, Mikhail Khodorkovsky, was convicted of tax fraud and sent to jail. Just recently, 'Putin oil,' oh sorry, I mean Rosneft, pardoned Mikhail Khodorkovsky because he is no longer the richest man on Earth. Many American natural gas producers are concerned that once Russia receives the technology from Exxon, the government of Russia will get excessive control and rights in shale gas exploration.

Canada is the third largest producer and exporter of natural gas. Last year, the Federal government had made it easier for producers to obtain export licenses. They even went so far as stating that exporters are free to apply without first demonstrating they have a dedicated supply of gas. PETRONAS, the Malaysian state-owned gas company invested $36 billion in its West Canadian LNG project. The goal of the partnership is to build a liquefied natural gas export facility on the British Columbia west coast, to ship shale gas to new markets. Unlike Russia, the Asian market recognizes Canada as a stable country and reliable producer, and that long-term agreements will not be damaged by any political discord they may have in the future. The Government of Canada believes that LNG exports could add up to one trillion to the GDP over three decades, and could finance a 100 billion prosperity fund to benefit local communities and pay off provincial and federal debt completely. Just weeks apart, you can see how Canada and the U.S. are maneuvering with the U.S. approval of a $10 billion facility in Texas, to supply emerging markets, and Canada's approval of an LNG export terminal in British Columbia. Both countries are targeting LNG exports to Asia, a $150 billion market, where Japan and South Korea consume more than half the world's natural gas stock.

The energy boom is one bright star that will build America's economy, create new jobs, and most of all, give America confidence for each generation to build from. If Americans feel that Google (NASDAQ:GOOG), Twitter (NYSE:TWTR), and Facebook (NASDAQ:FB) are growth stories that build on the character of who they are and what they are, then they are sadly mistaken. The growth and self-reliance of U.S. natural gas and oil has pushed Canada to export its natural resources to other countries, because of diminishing American reliance on Canadian oil and gas.

For example, EnCana Corporation ECA, a publicly traded stock in the NYSE, is a strong buy. It's taking steps to sell its natural gas to customers outside North America. EnCana acquired a 30% stake in the proposed LNG terminal in Kitimat, British Columbia. However, it was sold to Chevron to secure a foothold to sell natural gas to China. PetroChina initially signed a deal with EnCana to pay $5.4 billion for half of EnCana's Cutbank-ridge assets and future development. However, PetroChina felt that it was paying a premium for the asset which led to the failure to sign an agreement. It was too much money to pay for the privilege of learning the technology of how to extract shale gas. However, EnCana and PetroChina did agree on a joint venture to develop EnCana's Duvernay natural gas liquid in West-Central Alberta. The deal gives China a 49% stake in the asset in exchange for $1.18 billion. EnCana initiated a plan to focus 75% of its planned $2.4-2.5 billion capital in 2014 on liquid-rich assets in Montney, Duvernay, DJ Basin, and the Tuscaloosa Marine Shale, facilitating a 30% increase in year-over-year liquids production. This would accelerate its development of oil and liquid-rich areas of North America. EnCana aims to achieve operational excellence, while transitioning to a balanced commodity portfolio.

Chesapeake Energy CHK is another strong buy. Aubrey McClendon, co-founder of Chesapeake, was forced to step down because he believed that LNG should be used for domestic purposes only. A huge mistake due to the increasing demand of LNGs from China, who expects to have six LNG import terminals operational by the end of 2014, with another two under construction. Chesapeake is the leading producer in the Utica Shale, and owns five of the top ten oil producing wells in the region. Chesapeake has established higher production on lower operating costs from its underlying assets in Q3, which led to a 22% year-over-year increase in oil and natural gas. The company increased its LNG production by 31.7%, up from 4.1mmbbl to 5.4 mmbbl. The current CEO, Robert D. Lawlor, has succeeded in selling $30 billion of Chesapeake's assets to pay off debts, and improve Chesapeake's long-term strategy to sell natural gas liquids to European and Asian markets.

The race to export natural gas liquids to emerging markets has pitted Canada, the U.S., and Russia on different paths and different futures. Canada's economy relies on its resources, it has more to lose. It's staring at two ambitious giants competing with each other on a grand-scale. Remember one thing, that history has shown that Goliath was the odds-on favorite.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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