Liquefied Natural Gas: When Will the United States Begin Exporting It?

Includes: APA, COP, EOG, LNG, SRE
by: Investment U

By Tony D’Altorio

Though few know of it, the global energy industry might be in for some huge changes before long. Within the next five years, the U.S. could become a major natural gas exporter in the form of liquefied natural gas (LNG).

It already produces a daily 57 billion cubic feet a day of natural gas. Selling a mere 10% of that abroad would make it the largest LNG exporter in the world. The competition – Russia, Australia and several Middle Eastern countries – couldn’t match that. However, the U.S. also has to deal with a local issue that will make or break it in the end…

The Natural Gas Market

The natural gas market is already undergoing some changes, thanks to technological breakthroughs in shale extraction. In fact, the new methods might make it a bit too easy.

The International Energy Agency last year warned of an oversupply that could last years. “Global gas markets have evolved from a seller’s market, driven by tight supply and demand, to a buyer’s one as demand weakens while new supply comes on stream.”

That has proven especially true in the United States. Domestic prices have fallen to less than $4 per million BTU, down 70% from a peak of more than $13.50 in mid-2008. In response, U.S. imports of LNG fell as well, despite predictions that they would rise sharply. Its 10 LNG import terminals – and two more under construction – have basically been rendered unnecessary.

Meanwhile, half a world away, things look much different. On the LNG spot market in Asia, prices sit at around $10 per million BTU. At 10 billion cubic feet per day, Chinese demand definitely factors in.

That is still well below the U.S. daily intake of about 60 billion cubic feet of gas. But it continues to grow rapidly, well up from its 7.5 billion cubic feet just last year. Since analysts expect that growth to continue for years to come, Asia makes a great market to sell into. Australia and the Middle East already understand that, and now, the U.S. is beginning to catch on too.

The U.S. Natural Gas Glut

The U.S. natural gas glut has severely hurt companies like Cheniere Energy (NYSE: LNG), whose shares have tumbled from the mid-40s to below $3 over the past few years. With one underused LNG terminal along the Gulf Coast, its plans to build two more naturally crashed and burned.

Sempra Energy (NYSE: SRE), a diversified utility based in California, has seen its stock fall as well. But now, both companies have applied to the Federal Energy Regulatory Commission for permission to refit their terminals to export U.S. natural gas instead of import it.

If it succeeds in that, Cheniere plans to build a liquefaction terminal to make that possible. Natural gas must be cooled to about -260 degrees F to compress it to a liquid state before tankers can transport it.

The company already became the first to receive permission last year to import LNG, store it and export it later to those more attractive markets overseas. U.S. gas producers and energy executives are watching closely to see how well it does.

But overall, the idea makes sense. After all, as ConocoPhillips (NYSE: COP) CEO Jim Mulva stated, “Few countries can match our gas resources or our low [production] costs.”

Cheniere CEO Charif Souki couldn’t agree more. He says: “The size of the opportunity is enormous. It could affect the importance of the U.S. in the global energy picture.”

He hopes to begin exporting U.S.-based LNG by 2015… the same year that two of his local competitors plan on implementing a similar scheme. Apache (NYSE: APA) and EOG Resources (NYSE: EOG) intend to export gas from a shale field in Canada through their Kitimat project.

This may prove timely for the companies involved. Projections show the world suffering a daily shortfall of 1.5 billion cubic feet worth of LNG. So U.S. exports could fill that void quite nicely. And profitably.

The Final Say In Shale Gas Development

Notably though, that all depends on the politics of hydraulic fracturing, the process required to extract gas from shale. Environmentalists claim drilling for natural gas pollutes groundwater; energy companies insist it can and has been done safely for decades.

Right now, the U.S. Environmental Protection Agency is looking into the issue. If it sides even a little with the anti-fracking crowd, shale gas development will suffer under new regulations. And, in turn, U.S. natural gas prices will rise again. If that happens, the country could become an LNG importer. And Cheniere will have to refit its terminals once again.

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