Exporting Natural Gas Would Be Very Profitable For North American E&P Companies

Includes: APA, CHK, CQP, SRE
by: BoulderResearch

The recent shale boom in North America caused a glut of natural gas, forcing prices down to a ten-year low of $2.32 per million BTUs. This, coupled with weakened demand from mild winter weather, makes it uneconomical for companies to drill for natural gas in North America. According to Baker Hughes (BHI), total rig counts have significantly declined from 691 to 670 in the last week. Recently, Chesapeake (NYSE:CHK), the nation's second largest natural gas producer, announced that it will cut back its natural gas drilling program. Their year over year dry gas rig count will go down by 68% in 2012, from 75 to 24 rigs. CHK, producer of 9% of America's natural gas supply, plans to redirect capital from natural gas to liquid plays, making liquid 85% of its total capital spend in 2012.

The best way to alleviate the problem of natural gas oversupply in North America is to increase its export. The most economical way to export natural gas is to liquefy it; this type of natural gas is called LNG. In its liquid state natural gas takes up 1/600 of its normal volume, making it ideal for export. There are currently over 100 production, export and storage facilities in the U.S. Many companies have submitted applications with the U.S. Department of Energy for LNG export terminals, such as BG and Sempra (NYSE:SRE). The nation's largest exporter of LNG is Cheniere Energy (NYSEMKT:CQP). Last year, Cheniere's Sabine Pass terminal was the first export terminal project in more than 40 years to get authorization from the U.S. Department of Energy to export natural gas to major importing countries. Other companies trying to get permission to export natural gas from the U.S. are BG, Southern, Dominion and Sempra. In Canada, three companies are joining forces to build a terminal in British Columbia; Apache (NYSE:APA), EOG Resources (NYSE:EOG) and Encana (NYSE:ECA). APA has a 51% ownership in the terminal, called Kitimat. The export facility is being built to primarily transport LNG to Asia. As of March 19th the government of British Columbia announced that the Kitimat LNG project is moving forward with the signing of an interim regulatory agreement. Chesapeake states that the U.S. and Canada will likely be exporting LNG by 2015, and when this direction becomes evident natural gas future strip prices will increase.

If the US becomes a dominant exporter of natural gas it will completely change the global energy market. It would be enormously profitable for North American E&P companies since gas trades in the US at $2.50 per million BTUs, in Europe at $9, and in some places within Asia at up to $16. Natural gas is the only fossil fuel to increase its percentage in the mix of energy sources used globally, with the largest increase in Asia. By 2035, trade in natural gas is expected to nearly double, with gas from Russia going progressively more to Asia. The difficult part is getting the gas out of someone's back yard and transporting it overseas. The process of developing an LNG supply chain takes significant investment and a long time to establish. If natural gas prices continue to stay at current levels the demand for LNG exports from the US will continue to increase.

Disclosure: I am long APA.