part # 2 for shortages,,,04/20/04
Dear Investor,
The Story: The Supply/Demand Math Does NOT ADD UP
I can make this real simple. There is a large, growing gap between natural gas demand and natural gas supply that is about to spike prices.
This will wreak havoc on gas consumers and energy utilities…and drive the earnings power of natural gas producers sky high for the foreseeable future.
What's more, this shortage is NOT a one-year event -- it is a long-term secular shortage. Demand for natural gas exceeds new production, and without drastic curtailment of gas usage or dramatic growth of exploration and liquefied natural gas (LNG) imports, the shortage will get worse, not better.
THE NATURAL GAS STORY TAKES FLIGHT
I sort of feel that the natural gas story we've been telling has a parallel to the horse SeaBiscuit -- not appreciated, with no believers until the facts become too much to ignore.
The $6 gas we projected has come with a vengeance -- up from $4.35 on Nov. 4. I hate to say "I told you so," but sometimes I can't help it.
As we have forecasted all this year, natural gas prices have been only saved by the abnormal summer weather. Well, I've got news for you: The 59 billion cubic feet drop of gas in storage recently will increase to a 120 billion cubic feet drop for sure. We normally don't see a triple-digit draw down till much later in the season, but this is NOT going to be a normal winter weather-wise.
I'm preparing a more detailed Natural Gas Investment Boom/Supply Crisis report for release to ChangeWave Investing subscribers this month (if you aren't already a subscriber-consider a risk-free trial subscription today!) , but I'll cut to the chase:
Have you heard of the Pacific Decadal Oscillator (PDO)? This weather pattern was discovered in 1996. "Pacific" refers to the slow fluctuations of water temperatures in the northern Pacific Ocean. "Decadal" refers to a trend that lasts multiple decades, and "oscillator" means that the pattern moves back and forth between phases.
The PDO is similar to the well-known El Nino effect, but it's far less known than its 100-year-old cousin. Well, not for long.
According to expert researchers on the PDO, we have just finished a 20-year warm cycle in the U.S. and are starting the early stages of a cold cycle. When the PDO is in its cool phase, it drives frigid Artic Air southward into the U.S. in our winter season. (For an example of how this affects the weather, check the East Coast conditions today.)
Withdrawals from gas storage correlate with the number of days temperatures are under 65 in the key gas heating areas -- i.e. the central Mid-Atlantic and eastern regions of the U.S. With last winter only being 1.2% cooler than average, we withdrew a record 2.55 trillion cubic feet of gas -- and nearly ran out of the fuel in storage.
This year will in all likelihood be colder, and according to government records we will produce 4% LESS gas from existing reservoirs.
Since most underground storage facilities are damaged if less than 0.5 trillion cubic feet of gas is not kept in the formations, we have a serious problem on our hands. Like I said in our original report, our strategy for natural gas in this country has been to pray for warm winters.
We've run out of luck, I'm afraid. With a 20% probability of a warmer-than-normal winter (remember, last winter was normal -- the previous four were NOT) and a 50% chance of a colder-than-normal winter, seeing 2004 gas prices that are higher than this year is an unfortunate conclusion that we must come to as investors.
NO HELP FROM THE GREAT WHITE NORTH
Bear in mind, too, that Canada will cut exports to us in 2004 because they need more and more of their gas to extract some of the 186 billion barrels of oil they have locked up in their tar sands. We got 15% of the 22 trillion cubic feet of gas we used in 2002 from our friends to the north. Gas available for export DROPPED 2% in 2003 year and is on trend to drop another 3% this year.
Understand, too, that the sharp decline in the rate of gas production from existing wells is increasing in the U.S. -- and we are not replacing that depletion. We are now running 1,200 drilling rigs in the U.S. -- up from 800 in early 2000s. Yet we are producing LESS gas with 30% more drilling. The sophisticated 3-D seismic technology and horizontal drilling is depleting our existing reserves FASTER than just five years ago.
Since storage is only 15% of demand, and our Canadian imports will be lower at the same time, we will produce 3%-4% LESS gas in 2004 than 2003 -- we're stuck.
And now that our petroleum crisis is even more profound than our natural gas crisis (for now), we're faced with the Hobbsian choice of all time: become even more dependent on the Middle East for petroleum or pay higher prices of natural gas and have Canada build out its tar sand petroleum extraction business.
LIQUEFIED NATURAL GAS TO THE RESCUE -- IN 2025
As North American natural gas supplies inevitably fade, we will massively increase imports of liquefied natural gas (LNG), which is natural gas that must be cooled to minus 259 degrees Fahrenheit to convert it to liquid form before it can be transported by ship.)
The three main sources of LNG are Qatar, Iran and Russia, but the enviro-nazi element in the U.S. is making it impossible to build more LNG plants. So we're stuck there, too.
Less than 1% of the U.S. natural gas supply now comes from LNG, but by 2025, LNG imports are projected to account for 12% of U.S. supplies.
"Unless we stop using it, we need to import it," according to Richard Hoffmann, director of the division of gas-environment and engineering for the Federal Energy Regulatory Commission. "Imports from Canada are going to decline over time."
With 96% of natural gas reserves outside of North America, the United States is poised to launch an enormous campaign to build new LNG terminals.
But even there we have huge problems. We only have four working LNG receiving plants in the U.S., and we not built a new one in 20 years. With permitting roadblocks it will be 20 years before we stem our natural gas gap with LNG.
And even with the prospect of LNG, Weissman says the regulatory approval process could take at least six years, with another four to six years to build a facility. Each facility can cost anywhere from $2 billion to $7 billion.
Aside from LNG, a projected 2013 start-up of the Alaska gas pipeline remains hopelessly stuck in the regulatory mud.
Eco-extrmists have placed restrictions and environmental pressures on the colossal reserves of natural gas in the lower 48 states. In the Rocky Mountain area alone, experts forecast roughly 29 percent of reserves, or 69 trillion cubic feet of gas, is currently off-limits to exploration and development.
And finally -- with coal-fueled power plants virtually un-permittable in most areas of the U.S. -- and nuclear power in the same sad state-the only logical expectation for natural gas supply and demand in the U.S. is ever more out of balance.
THE INDUSTRIAL FACTOR
And now a new wild card in gas demand has emerged -- industrial consumption.
With gas prices spiraling over the last four to five years, much of the big industrial natural gas users have simply closed plants and moved offshore to lower prices.
Take, for example, the fertilizer industry in the U.S., which had 20% of its capacity closed down PERMANENTLY in the U.S. due to greater than $5 natural gas and no ability to pass-on higher costs to their customers (i.e. no pricing power).
Well, guess what? Fertilizer prices are now skyrocketing because demand for basic foods like corn and soybeans from China and Brazil (and to a smaller extent Russia and India) have driven crops prices to multiyear highs.
Higher crops prices mean farmers can pay more for their key ingredient -- dimonium phosphate fertilizer. And what is the key feedstock for fertilizer? Natural gas.
With dimonium phosphate at $198 a ton vs. $115 four years ago -- making fertilizer is now suddenly VERY profitable no matter what the cost of natural gas. With no end in crop demand in the near future, industrial use of natural gas is going to grow for the very first time in a period where prices exceed $5. Bad timing.
Another "dead industry" coming back to life in the U.S. is steel.
Steel is another BIG user of natural gas -- take coke, sand and natural gas in a blast furnace and you get steel. With the price of a hot-rolled steel band now $580 a ton versus $250 last year, we have ANOTHER big user of natural gas back in the market.
Finally, the much higher efficiency power plants we now have in the U.S. make more money producing electricity with gas at $6 than with crude at $30, so even the demand there is not killed by $6 natural gas.
If the solutions to this demand imbalance include:
Opening up gas exploration where no one seems to be able to get Congress to approve it
Building 20 new nuclear power plants that everyone needs but no one wants in their back yard
Adding 15-20 LNG terminals that will take a minimum of 10 years to complete even if they were 100% approved and funded TODAY
Building an Alaska Pipeline which has never gotten CLOSE to a winning vote
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