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Golden Age of Gas? How to Tap the Market

|Includes: CLNE, ENB, FSYS, GE, Kinder Morgan, Inc. (KMI), WPRT
I'm a believer; I have been for years. Now, finally, the International Energy Association (NASDAQ:IEA) has joined the ranks of natural gas enthusiasts. We agree (at last) that the future of expanding the world's energy supply lies in natural gas.

It took a lot of convincing for the IEA to make this leap. But in its latest report, entitled "Are We Entering a Golden Age of Gas?", the IEA answers it own question. Yes, a very golden age for gas is definitely on the horizon.

If a picture is worth a thousand words, then this IEA graph says it all. Gas will eventually surpass coal as an energy source, and will even rival oil.

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This a major trend for investors looking at the future of the energy sector. Natural gas supplies will become more abundant as new reserves are discovered, more valuable and in much more demand.

The energy watchdog says there are a number of major forces driving the move towards natural gas over the next quarter century.

  • ample future availability of gas (much of it unconventional) from immense new sources like the vast shale deposits now being discovered, coal-bed methane and so-called tight gas

  • lower growth projections for nuclear power due largely to reaction to Japan's Fukushima nuclear disaster

  • more use of natural gas in road-transport, especially trucking

  • low gas prices relative to oil, thanks to abundant gas supplies

The China Factor

China comes in for special attention in the IEA's ground-breaking report. Although it is a relatively small gas consumer right now (equivalent to Germany), China's 1.3 billion people will expand their consumption radically, consuming the equivalent of the entire European Union by 2035.

Geographically vast, China will dramatically increase its own production but will be forced to import enormous amounts from the world's gas-producing regions. "Unconventional" gas production will grow exponentially and China is already relying on western firms to help it develop its shale reserves.

The following graph captures the expansion of global demand. As you can see, the ballooning of Chinese gas usage is dramatic.

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This important graph shows how the world energy picture will change by 2035. As you can see, the U.S. will dramatically expand unconventional gas development. China's rate of growth will be similar. But total Chinese potential production will be far below that of the U.S. and Russia.

Although China has relatively low gas usage now, it has big plans for the future. Only ten percent of Chinese homes have access to natural gas compared to a 40 percent average worldwide.

Looking toward the future, Beijing plans a very rapid and dramatic expansion in the sector with more than eight percent of China's energy coming from natural gas by 2015. Homes and very dirty, coal-burning power plants will be encouraged to shift to gas.

Why the focus on China? Don't forget that China is already the world's number one energy user, and its demand is mushrooming.

How to Play the Golden Age

I believe it would be a mistake to by only natural gas producers in the short run. Gas prices are depressed and the prices for oil are currently stuck in a declining trend. Share prices in the sector will be volatile in the near term.

Infrastructure appears to be the way to go. The IEA report draws a very clear vision of the future – a vision that industry planners won't ignore.

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Demand from Asia, China, India and Europe will see a huge rise in the next quarter century. Much of this exported gas will be in the form of LNG (Liquid Natural Gas).

With such hungry markets and abundant supply in North America, I expect we will see a boom in exploration and extraction. Pipeline development, involving steel, manufacturing and transportation equipment will be the next logical step. Eventually export terminals and LNG tankers will become the final component in the development of the golden age of gas exporting.

Here are a few companies that may benefit from the gas infrastructure boom. El Paso Corporation (EP), and Spectra Energy Corp (NYSE:SE) are heavily committed to a vast effort to exploit the legendary Marcellus shale project. They are also developing the primary infrastructure need for use of this resource with their announcement of the execution of a Memorandum of Understanding to jointly develop the proposed Marcellus Ethane Pipeline System.

The company says: "By virtue of its extensive pipeline system, Spectra Energy is now one of the premier natural gas midstream companies in both the U.S. and Canada. Spectra Energy owns more than 17,500 miles of natural gas transmission pipelines, and approximately 250 billion cubic feet (Bcf) of storage capacity in the United States and Canada." Spectra also has massive storage capacity.

Other possibilities: Fuel Systems Solution (NASDAQ:FSYS), a strategic natural gas transportation infrastructure provider. Smaller cap possibilities include Clean Energy Fuels Corp (NASDAQ:CLNE) and Westport Innovations (NASDAQ:WPRT) which are involved in natural gas usage in the transportation industry, a sector that may be slow to develop as long as oil prices remain at current levels.

On the very large cap side, consider General Electric (NYSE:GE), which is a leader in gas turbine electricity generation. Demand in this sector is likely to rise as coal prices increase, and the nuclear industry continues to feel pressure.

The grand total for gas infrastructure? Thirty three trillion dollars by 2035 according to the IEA. The report provides a wealth of detail and is worth a good read by serious investors at the IEA website:

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