LNG Facilities a key topic of Wall Street Transcript Exploration & Production Issue
Wednesday February 1, 3:35 pm ET
67 WALL STREET, New York--February 1, 2006--The Wall Street Transcript has just published its Integrated Oil & Gas E&P issue, a report offering a timely review of the sector to serious investors and industry executives. This 106-page feature contains an expert roundtable forum of leading industry analysts, 4 interviews with analysts on specific sectors, and industry commentary through in-depth interviews with top management from 20 firms. The issue also contains an "Off-The-Record" Review of management by management. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
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Topics covered: Outlook for oil and gas prices, Drilling activity outlook, Hedging activity, Management performance, Production-sharing contracts, Mergers & Acquisitions, Reinvestment of capital, Environmental issues, Potential of ANWR, Demand destruction, Natural gas exploration, Geopolitical risk factors, Gulf Coast hurricane impact, Supply and demand for LNG, Pipeline sector.
Companies include: Anadarko Petroleum Corporation (APC), Abraxas Petroleum Corporation (ABP), Apache Corporation (APA), ATP Oil & Gas Corporation (ATPG), Berry Petroleum Company (BRY), BP (BP), Burlington Resources, Inc. (BR), Carrizo Oil & Gas Inc. (CRZO), Deep Well Oil & Gas Inc. (DWOG), Devon Energy Corporation (DVN), ConocoPhillips (COP), Encana Corporation (ECA), Equitable Resources (EQT), ExxonMobil (XOM), Murphy Oil (MUR), Petrohawk Energy (HAWK), Ultra Petroleum (UPL), Houston Exploration (THX), Newfield Exploration Company (NFX), Pioneer Natural Resources (PXD), Energy Partners Ltd. (EPL), Goodrich Petroleum Corporation (GDP), Williams Companies (WMB), Questar (STR), Cheniere Energy (LNG), Sempra (SRE), AGL Resources (ATG), Northwest Natural (NWN), Atmos (ATO), KeySpan (KSE), Chevron (CVX), Arctic National Wildlife Refuge (ANWR), Newfield Exploration Company (NFX), NGAS Resources Inc. (NGAS), Occidental Petroleum (OXY), Peyto Energy Trust (PEY:TSX), Range Resources Corporation (RRC), Swift Energy Company (SFY), Petrel Resources PLC (PET.L), Royale Energy Inc. (ROYL), Western Gas Resources INC. (WGR), Storm Cat Energy Corporation (SCU), Vaalco Energy Inc. (EGY), W&T Offshore Inc. (WTI), Tri-Valley Corporation (TIV), Kinder Morgan (KMI) and McMoRan Exploration (MMR). Analysts Include: Raymond Deacon, Harris Nesbitt Corp.; C. Van Levy, Dahlman Rose & Company, Bruce Lanni, A.G. Edwards & Sons, Inc., Fadel Gheit, Oppenheimer & Co., Faisel Kahn, Citigroup Global Markets, Anatol Feygin, Bank of America Securities.
In the following brief excerpt from the 106 page report, Faisel Kahn discusses the outlook for developing LNG facilities and also the prospects for investors.
TWST: In terms of LNG, is the constraining factor the infrastructure or the availability?
Mr. Khan: The constraining factor is building the liquefaction infrastructure. So the stranded gas is certainly there, but the limiting factor is going to be how fast these countries that own the stranded gas are going to be able to bring those facilities online. And that's basically a choice that they can make at any point in time, and it also might be a way for them to maximize the value of their stranded gas. They won't bring too much supply online all at once because that would drive down the price of LNG. There are enough tankers being built and there are enough proposed regas facilities in the US, Europe and the Far East. So the limiting factor clearly is going to be how fast these countries that own the stranded gas are going to want to develop those reserves.
TWST: And that's a political decision?
Mr. Khan: I think it's economic and somewhat political. I think economic because you don't want to open the spigot too much, otherwise the price will come down. In order to maximize the price of LNG, you want to have an adequate supply of liquefaction in the market, but not an excess amount of supply.
TWST: As you say, the US market is stable and attractive. What's the difficulty of getting the offloading facilities built here?
Mr. Khan: We are seeing new regas facilities being built in the US right now. Right now, Cheniere has two facilities under construction in the Gulf of Mexico, one at Sabine and one at Freeport. You have Sempra that's got a facility under construction in Cameron, Louisiana, and one on the West Coast in Mexico. You also have Exxon Mobil (XOM) that received permission to build a facility in Louisiana, and Occidental (OXY) that's building a facility in Texas. So facilities are being developed and built. The existing facilities in the US along the Eastern Seaboard and in Louisiana are also expanding their current facilities. So I don't think that there is going to be a problem in terms of building these regas facilities in the US. In our models, we are saying that by 2010, the US is going to need about 10 Bcf a day of baseload LNG. We think that by 2010, there will probably be a total of 20 Bcf a day of capacity within the Continental US. So there is more than enough regas capacity for the base amount of LNG demand we need.
TWST: As that builds up and you get some excess out, is that going to put pressure on pricing?
Mr. Khan: You've got 10 Bcf a day of demand for LNG, but you're also competing for some of that LNG demand across the globe. What happens is that you start to look at the highest cost natural gas producer in the US and compare his price to produce domestic gas to LNG prices around the globe. There has to be some equilibrium price that is met between this marginal producer and LNG to meet supply in the US, Europe and the Far East. So if we look at the US, that marginal well is going to be in the Gulf of Mexico. Assuming we get our allocation of global LNG supplies in the US, the US is still going to need to continue to drill for natural gas. You are still going to need to drill for gas in the Gulf of Mexico, and finding and development costs in the Gulf are fairly high. So I think a $5.50 or $6 NYMEX gas price would make sense to continue to produce gas out of the Gulf of Mexico. But to the extent that global prices are volatile, that could have a different impact on overall pricing in the US and abroad. So essentially you could continue to have a volatile pricing environment in the US. If there is not enough LNG across the globe, then the US will end up competing for LNG based on price.
TWST: When you talk with investors at this point, what's the level of interest you're finding in this space?
Mr. Khan: Generally, in our specific space, there seems to be a tremendous amount of renewed interest in this sector. After the merchant energy collapse, a lot of investors had basically ignored these names for a long time. But, most of these companies are still major pipeline companies and given the changing dynamics of flow of natural gas in the US, capital needs to be committed to move more gas out of the Rockies and build more LNG facilities in the Gulf of Mexico. Many of the companies in our sector have tremendous capital expansion programs.
If you look at Sempra, they are building two new LNG terminals with a third one in the permitting stage. They're also building a pipeline from the Rockies all the way to the East Coast and that's a $4.5 billion project. Unlike in the past where earnings were driven through trading and marketing, today earnings are growing through expansion capital on the pipeline system, rate base at the gas and electric utilities, and increased drilling.
TWST: So getting back to basics.
Mr. Khan: Yes. They have been back to basics for a long time now. It's back to basics, but now you've got a growing industry. So if you went back to 2002 through 2004, you had declining capital expansion programs every year in the industry. We went from roughly $4 billion in capital expansion programs on the entire North American pipeline system down to less than $2 billion in 2004. As you look at 2005, 2006, 2007, 2008, all those numbers are in a steep incline right now and that should continue throughout the next decade. You have the Mackenzie pipeline getting built from Northern Canada, an Alaska pipeline getting built, LNG terminals getting built and new Rockies pipelines getting built. There is an enormous amount of capital being deployed to this industry.
The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 106-page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .
The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.
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