If clean-burning, abundant natural gas is the efficient energy
of the future, why is it so darn cheap, hitting 10-year lows this
week near $2.20 per million British thermal units (MMBtu)?
That's probably a rhetorical chicken-egg question because a big
part of the reason nat gas might be the energy of the future is
precisely
because
it's so abundant, which in turn makes it so cheap.
But in an era where there is vociferous debate about energy costs
and energy security due to (1) the rising price of crude oil and
(2) US dependence on imports, there are some even more interesting
questions to ask about cheap, clean-burning, and
domestically-abundant nat gas.
The answers could lead to higher prices and more energy security
for the US if things are done right.
First, where did this abundance suddenly come from to drive the
persistent down trend since 2009, from $6 to nearly 2/3 lower, to
say nothing of price spikes into the mid-teens in 2005 and 2008
that now seem ridiculous?
Mostly because energy companies found ways to more efficiently
exploit vast North American shale deposits through advanced
hydraulic fracturing
("fracking") technology, accessing untold reserves that lead to
supply estimates stretching into the hundreds of years.
Wasn't an unseasonably warm winter a big factor too?
Of course, but it's the growing inventories and proven reserves
that have the biggest effect on the long-term price trend.
Second, what could possibly reverse the course of nat gas prices
and thus the fortunes of companies like
Chesapeake
(
CHK
),
Devon
(
DVN
), and
Anadarko
(
APC
) who produce it?
If T. Boone Pickens' Nat Gas Act gets through Congress, subsidizing
the conversion of 18-wheeler engines to run on nat gas, will that
drive the price higher, or at least lower the price of crude oil?
Probably, but that's a big "if." And as good as nat gas engines
sound for the environment and the economy, raising the price of the
fuel used to heat most homes and cook most meals in the US might
create a public backlash.
And the actual success of the Nat Gas Act legislation walks a field
of landmines in the oil vs. gas war where "big oil" likes the
relatively high price of crude and doesn't want cheap nat gas
pulling the floor out from underneath them.
How about exporting compressed natural gas liquids (LNG and CNG) to
Europe and Asia, where the price of nat gas is much higher -- could
this be a good move for US energy security because it will cause
those regions to buy less oil from the Middle East?
All of these questions and more were addressed recently at the IHS
Cambridge Energy Research Associates' annual conference in Houston.
The event was attended by management of top energy names from
around the world.
Government Energy Policy (and Politics) is the
Wildcard
The biggest concern of energy CEOs in answering the engine and
export questions was government commitment and transparency. Energy
companies need certainty about energy policy and government
intervention for the simple reason that big projects take big
investment over time to develop.
Case in point, before we knew there was such vast reserves of
natural gas in North American geologic formations known as shales
-- the Bakken in North Dakota, the Marcellus in the East, the Eagle
Ford in Texas -- there were billions of dollars poured into
developing natural gas import terminals in the Gulf.
From a March 7 Wall Street Journal article by Angel Gonzales, who
attended the CERA conference...
The energy industry "must wager billions of dollars on long-term
projects that can be rendered useless overnight by new
developments.
Some mistakes have already been costly. For example, the plethora
of U.S. liquefied natural gas terminals that were built in the last
decade, at the cost of tens of billions, in the expectations that
shiploads of the stuff from Africa and Trinidad would be quickly
snapped up by energy-hungry U.S. consumers.
Now, those terminals are sitting mostly empty, as the last decade
also saw the unexpected development of domestic shale resources,
which have made the U.S. a natural gas superpower with no need for
imports."
And here is how
Exxon
(
XOM
) CEO Rex Tillerson summed it up, referring to the "political
calculations" of the Obama administration in blocking approval of
TransCanada's planned Keystone XL pipeline from the oil sands in
Alberta to the Gulf Coast...
"In order to meet growing energy demand, our industry needs to be
able to plan over 10-, 20- and even 30-year time horizons.
Political considerations based on two- and four-year political
cycles are a significant hindrance to the long-term planning and
investment which can affect jobs and competitiveness for decades."
King of Nat Gas Exports
Many industry analysts now believe that the US could be the biggest
supplier of natural gas to the rest of the world. Some of the
companies involved in that export business are
Cheniere
(
LNG
) and
Golar LNG
(
GLNG
).
Cheniere is building the main export terminal at Sabine Pass in
Louisiana and already has contracts going out ten or more years for
delivery of hundreds of millions of metric tons of nat gas to
Europe and Asia. Golar is a Norwegian tanker company specializing
in Floating Storage and Regasification Units (FSRUs) that can
receive, transport, and deploy liquid natural gas.
But there is, of course, natural resistance by oil companies to
having this become a big trend and consequently threatening crude
prices dramatically.
Unless...
Unless big oil actually had a reason to support the full
exploitation of our nat gas power through the Nat Gas Act and
exports. Say again? I know, the moving parts in this puzzle are
enough to make your brain hurt.
Tillerson again: "Demand for natural gas will increase by 60% over
the next three decades, during which time resources will grow by
more than 400%."
Here's what an industry insider and former energy lobbyist told me
that clarifies why Tillerson might support the Pickens' plan and
exports:
"Tillerson realizes that if US nat gas cannot be liquefied and
exported, the rapidly growing demands for energy in emerging
markets will be met with overseas (largely OPEC) oil, meaning less
availability for that commodity to make up the shortfall here in
the US. And that would naturally raise prices (good) but infuriate
the US public and the politicians (bad). So, my guess is that for
Boone's gambit to have any chance of success, the support of the
big oil forces is needed. And that will only come if provisions are
included in the bill for LNG exports."
I think the forces are finally in play for natural gas to be used
fully and intelligently in the next few years. Does that mean we
won't see a $1 handle on nat gas this year? Of course that's
possible. But buying the companies that will best be able to
exploit and profit from higher nat gas prices could be one of the
best trades of the decade.
Kevin Cook is a Senior Stock Strategist with
Zacks.com
ANADARKO PETROL (
APC
): Free Stock Analysis Report
CHESAPEAKE ENGY (
CHK
): Free Stock Analysis Report
GOLAR LNG LTD (
GLNG
): Free Stock Analysis Report
CHENIERE ENERGY (
LNG
): Free Stock Analysis Report
EXXON MOBIL CRP (
XOM
): Free Stock Analysis Report
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