Interesting report from Investment U
Three Reasons Natural Gas Prices Will Rise, and the Best Way to Play It Globally
These days, natural gas producers are like the big homebuilders. Everyone hates them. Investment managers steer clients away from them, saying they've got further to fall.
Why? Natural gas prices are the lowest they've been in years... at least in the United States. But a year from now, the situation will look a lot different. Investment U's energy expert, David Fessler, expects natural gas to be trading 25 to 50 percent higher here in the United States than today's prices.
There are three key reasons for this optimism, and several ways that you can position yourself to take advantage of the coming price rise.
The Surprise Supply Glut
Over the last several years, natural gas companies like Chesapeake Energy (NYSE: CHK), Range Resources (NYE: RRC) and a host of others have surveyed and drilled major shale gas fields all across the United States.
With so much recently discovered gas being dumped into the U.S. market, prices here plunged. Prices hovered near $4.00 per million British Thermal Units (mBTUs) for more than a year.
Shale gas already accounts for 22 percent of the nation's natural gas supply... According to Energy Information Administration estimates, it could supply as much as 14 percent of all the gas in the world by 2030.
Right now, the oversupply and continued concern about weak prices weighs on most U.S. shale gas leaseholders and conventional gas producers. Many players in the market are just sitting on their proven undeveloped reserves (PUDs), shutting in wells or not drilling them at all.
Some shale fields also contain natural gas liquids (crude oil), like the Eagle Ford shale play in Texas. Operators who have leaseholds in liquid plays are redeploying rigs there to take advantage of higher crude oil prices.
But the time is soon coming that these producers will quickly shift back to natural gas production. Prices will rise due to three major trends, causing a demand increase to meet this oversupply.
Reason #1: Utility Customers are Lining Up
While the natural gas producers bemoan lower prices, electric utilities line up to buy. Nearly every new plant to come online in 2010 and 2011 uses natural gas as its primary source of fuel.
Historically, the only power plants that used natural gas as a fuel were peaking plants. Those are generators that utilities turn on only during peak times of energy use. They're expensive to run, and utilities pay top dollar for the natural gas they use.
More recently, utilities are converting old, dirty coal-fired power plants to run on much cleaner burning natural gas. These are big, base-load power plants, online all the time. That allows utilities to negotiate long-term lower priced contracts for the gas they burn.
Reason #2: The Growing Aversion to Nuclear Power
Ever since Three Island and Chernobyl, nuclear power has been on the back burner in the United States. The newest (and only) plant under construction by Southern Company doesn't have an operating license yet, and probably won't go online for at least a decade.
After the Fukushima earthquake and tsunami in Japan, plans for new nuclear power plants were either shelved or delayed all over the world. As Japan rebuilds, it relies heavily on natural gas and other fossil fuels.
Meanwhile, countries around the world have reevaluated nuclear power plant safety. Germany announced it's getting completely out of the nuclear by 2022. And New York Governor Cuomo is adamant about shutting down the Indian Point nuclear plant, just north of New York City.
All this generation capacity will have to be replaced by other sources, and natural gas is the fuel of choice.
Reason #3: The Exporter Shortage
Nearly every gas import terminal in the country (there are nine of them) applied for permits to install natural gas liquefaction plants. The reason? The demand for natural gas is booming just about everywhere else in the world.
Qatar, the world's largest exporter of natural gas, will soon hit its full annual export capacity of 77 million tons, in the face of global demand that can absorb nearly as much as the world can produce.
In the wake of the multiple disasters in Japan, the country is importing an additional four million tons over the next year from Qatar. The nation has entered negotiations to purchase even more.
Fatih Birol, the head of the International Energy Agency, commented on the opportunities for LNG producers in an article in The Wall Street Journal: “Post Fukushima, there will be a lot of opportunities. Japan and Korea both have new long-term contracts in the next four years, and China demand is booming. As of 2015 they will have to import as much as [all of] Europe today.”
According to Frank Harris, an LNG expert at Wood Mackenzie, Asian demand for LNG is going to skyrocket to 241 million tons in 2020 from 138 million tons in 2010.
With worldwide demand on the rise and no new large-scale LNG projects due to come online in the Asia-Pacific region for at least the next five years, the door is open for the United States to provide some of the slack. Nearly every U.S. company that owns an LNG import terminal has plans to add export capability in the coming decade.
Demand for LNG globally was 220 million tons in 2010. That's expected to triple in the next 20 years. Argentina, Brazil, Kuwait and Dubai are recent members of the LNG buyers' club.
Thailand and Singapore will shortly open their first LNG receiving terminals, and
Indonesia, Malaysia, Pakistan, Sri Lanka and the Philippines all have others in the works.
A similar picture is emerging in South America, Europe and the Middle East.
For these reasons, it's a good time to like companies involved in LNG exports. One company to consider is Cheniere Energy, Inc. (AMEX: LNG). It operates the Sabine Pass LNG facility, in Cameron Parish, Louisiana; and it will become the first LNG export facility to come online.
Cheniere recently received DOE export authorization to export LNG. Construction will begin in 2012. Sabine should come online in stages starting in 2015. It's also negotiating definitive long-term export contracts with numerous customers, including Petronet in India.
Think Beyond the United States
Although Cheniere Energy is a strong long-term play in the United States, it's important to look for other opportunities happening worldwide. Chieniere is a purely speculative play given the regulative hurdles that the company still faces.
For this reason, it's important to look for companies entering the LNG game, but have the cash and history of innovation that exhibit a commitment to taking reins of the natural gas revolution.
One of the best natural gas projects in the world is underway in Australia. And one of the best energy companies in the world is its operator.
Australia, like America, is awash in natural gas. Keep in mind, Australia also isn't currently experiencing the economic uncertainties about its debt and currency that we are. The Australian dollar is considered one of the best currencies in the world for its stability and due to its nation's strength in commodity production. That's where natural gas comes in.
But Australia's gas isn't conveniently located under terra firma, near existing pipelines. Most of the gas down under is in giant underwater deposits, located more than 100 miles from Australia's shores.
Developing some of its largest fields, far from any landmass, has been a problem without a solution... until now. This is an interesting opportunity for investors looking to capitalize on innovation in natural gas production outside of the United States.
LNG production is headed for the high seas. In May 2011, Royal Dutch Shell (NYSE: RDS-A) announced plans for the world's first floating liquefied natural gas (FLNG) manufacturing ship.
However, calling the Prelude FLNG project a ship really doesn't do it justice. It'll be the world's largest floating man-made object, weighing approximately 600,000 tons. To put it in perspective, that's six times the size of the world's largest aircraft carrier.
After researching the concept for 15 years, it took Shell engineers more than 1.6 million man-hours to design it. The Prelude will be constructed from 260,000 tons of steel by Samsung at its Geoje Shipyard in South Korea.
Construction is expected to take four years, with initial service beginning in 2016. And how much will this behemoth cost? Shell estimates somewhere between $10.8 billion and $12.6 billion. You can see a conceptual video of the Prelude here.
Shell made the announcement from Perth, Australia for a reason. Prelude will initially be located 125 miles off the coast of northwestern Australia. Once anchored, it will remain in place for 25 years. That's the estimated life of the Prelude field in the Browse Basin. The Prelude field was first discovered by Shell back in 2007. It's estimated to contain three trillion cubic feet of natural gas.
Analysts estimated annual production at approximately 5.3 million tons of liquids. This includes 3.6 million tons of LNG, 1.3 million tons of condensate and 0.4 million tons of liquefied petroleum gas. Once production is complete at the Prelude field, Shell plans to move it to other fields where the company has an interest.
Australia is one of Shell's key growth areas. It expects the investment in Australia could top $30 billion in just the next five years. Its major projects include the Prelude field and the Gorgon natural gas field. Gorgon and the adjacent Jansz-lo gas fields are estimated to contain as much as 40 trillion cubic feet of natural gas. Both could remain viable sources for as long as 60 years.
Shell also has a 25 percent interest in the Gorgon project, with Chevron Corporation (NYSE:CVX) and Exxon Mobil Corporation (NYSE: XOM), which each hold a 25 percent interest in the project, too.
Full Steam Ahead for FLNG
Why is FLNG so revolutionary? Simple. Many offshore wells that contain oil also contain large amounts of natural gas. In the past, a small portion of the gas has run the turbines that supply power to the oilrig.
Oil can simply be loaded into tankers from any rig. But there's been no economical way to liquefy the gas and ship it to shore. So the bulk of it ends up being burned at the top of giant flare-off towers.
Shell's announcement of the Prelude marks a huge vote of confidence for what is now a fledgling industry. That won't be the case for long, however. That's why Shell's FLNG project represents the beginning of what will become standardized practice in a decade or so.
Shell has plans for more FLNG units on the drawing boards, including its Greater Sunrise projects in East Timor, and others in South America, Cyprus, East Africa and Indonesia.
In short, FLNG will change the way gas is transported and priced, and make it available to many countries that have no resources of their own. Royal Dutch Shell is leading the charge, and investors should target its natural gas revolution as a reliable long-term investment.
