More background on the markets and LNG

A couple of articles with some interesting titbits.

First, from Barrons. Author Jim McTague argues for more US efforts on LNG to save European and Asian partners from Russian strangulation.

  • Drilling and producing certainly would enrich us as a nation and generate new revenue to help pay down our enormous national debt. The liquefied-natural-gas market sizzles. Australia, Russia, Norway, Trinidad and Tobago, and Egypt all are investing heavily in LNG production plants to profit from soaring worldwide demand.
  • The world’s largest producer right now is Indonesia, which exported 1.1 trillion cubic feet of LNG in 2002, 21% of the world’s total exports, according to the Department of Energy. Most of that gas was imported by Japan, Taiwan, and South Korea.
  • Algeria is the world’s second-largest producer, exporting 935 billion cubic feet of product to France, Belgium, Spain, and Turkey. Malaysia ranks third, exporting some 741 billion cubic feet, primarily to Japan.
  • There is just one LNG plant in the U.S. — in Kenai, Alaska. It has been shipping its product to Japan for over 30 years. The plant, which is owned jointly by Conoco Phillips and Marathon Oil, is small potatoes, producing roughly 68 billion cubic feet annually. Trinidad and Tobago, in comparison, produces 189 billion cubic feet per year.
  • Currently, Japan is the world’s largest consumer of LNG, at 3,135 billion cubic feet a year. The European Union imports 1,999 billion cubic feet, with Spain consuming the greatest share of it. The EU’s demand for LNG is projected to triple by 2020 as domestic supplies dwindle, according to international consulting firm A.T. Kearney. The European Union, ominously, obtains 28% of its current natural-gas supply from Russia, via pipeline.
  • Building new production facilities in the U.S., unfortunately, would be no easier than building an LNG receiving facility, which is why we have but one, small production facility even while the market soars. Producers need committed local support and federal support before they will build these expensive projects. There is no such support here.
  • Attempts to build an LNG terminal in Washington County, Maine, have been delayed by local lawsuits and opposition by Canada, which says that it will not let tankers sail through its waters to get to the proposed U.S. facility, claiming an environmental threat to the bay. Canada is a big exporter of piped natural gas to the U.S. Members of Congress have helped block LNG terminals in Massachusetts, Maryland, and nine miles off Long Island.
  • New liquefied natural gas production facilities in Australia cost the equivalent of $9 billion to $12 billion. They’d certainly cost several billion more in the lower 48, where the energy industry faces expensive, drawn-out permit processes and serial lawsuits from environmental and real-estate interests. This is unfortunate. In addition to freeing us from the whims of the energy tyrants, the facilities could help revitalize blighted cities. With apologies to the local chambers of commerce, New Orleans, Camden, and Detroit come to mind.

A couple of comments:

  1. Indonesia, LNG’s biggest exporter, is cutting back exports
  2. Leaving importers like Japan, Korea, but also China scrambling for supplies also because the latter has ceased to export coal, as we reported earlier here.
  3. New LNG facilities are a lot cheaper in PNG due to the profuse flowing of the wells (contrary to the Australian ones which is largely coal seam gas, wells that have to be treated first and more have to be drilled because of lower gas flows), cheap labour (contrary to Australia, PNG can import Filipino craftsmen), and favourable tax and permit environment.

Interview with Eric Sprott on the energy markets (from the same Barron issue):

  • You’re a believer in the peak-oil thesis, which says that global oil production has topped out. How much time do we have left before the supply dries up?
  • We aren’t going to run out of oil in the next 100 years, but it will keep getting harder and more expensive to obtain.
  • We’ve made great strides in technology; it’s true. Every year, there’s something new. We see people get some stripper oil well to go from seven barrels a day to 15, by using sonic-resonance or water-flow technology or nitrogen injection, or whatever. But technology can simply speed up the depletion rate. A big fear is that the largest oil field in the world, Saudi Arabia’s Gowar, which brings us just above 4 million barrels a day — 5% of global oil — is being depleted. They put 6 million to 7 million barrels of water into the formation every day. Oil floats in water, so as the w ater level moves up, the oil rises to the top. Someday, the water level will go above where they are producing the oil, and they’ll just get water. There’s not going to be a slow decline rate at Gowar. When it finally goes, there’s going to be a very quick decline.
  • What about natural gas? Hasn’t more sophisticated technology made it easier to produce more?
  • Yes. Fracturing techniques and horizontal drilling have caused things to pick up. But with these new discoveries, the first year’s production is quite flush, but then there’s a very sharp decline. In the fourth year out, production is probably 5% of the first year’s or something like that. But there have been some great strikes, in the past decade and particularly the past couple of years, in places like the Haynesville Shale in Louisiana and Texas, the Utica Shale in Quebec and the Montney Shale in British Columbia.
  • What about oil demand? It’s putting pressure on supply, too.
  • You’re right. I’m not even going to discuss the demand side, but I read in a newspaper that 70 million people around the world are joining the middle class each year. That means more people using more oil.
  • Where is the price of petroleum going?
  • Long-term, up… almost forever. What it goes to, I don’t know. But I can see it hitting $200 or $300 or $400 a barrel. And if oil goes up, it will drag most other energy-producing products with it. Not that coal and uranium don’t have their own fundamentals, but certainly costly oil wi ll mak e alternative energy sources more popular.

Some comments from us:

  1. We think he’s right, oil will move up long-term, the current dip is temporary due to the weak economy, we’ll have more on that below
  2. IOC’s wells flow profusely without any fracturing or horizontal drilling.

Chris Nelder on the commodities market

  • The action in oil has been likewise counter-intuitive. The loss of approximately 1.5 million barrels a day of oil supply from the world market due to the conflict in Georgia caused a mild one-day uptick in its steady decline from a peak of $147 to $113.
  • In a normal world, such a cut in supply would be enough to pack another $20 or more onto the price of oil. If the Saudis were to suddenly cut 1.5 mbpd of production, you can bet it would have a huge impact on the price. But this isn’t a normal world. This is Upside-Down world, where everything does the opposite of what you expect. For a short while.
  • Is the renewable energy business so much worse this year than it was last year, such that the best names deserve to have their stocks whacked by 40%? No, not at all; in fact the business has grown substantially since last year.
  • Is the world suddenly losing its appetite for oil and natural gas? No, demand is still higher than ever before. Although the rate of growth is slowing somewhat due to record prices, demand in Asia and the Middle East is still red-hot and will continue to outweigh declining demand in the US and Europe.
  • Is demand for base metals, fertilizer, and food so much lower now than it was in the first half of this year? No, we still want more and more of everything. So what’s the deal?
  • The recovery of the dollar, however illusory, is the main factor taking down the price of gold, oil and other commodities. As I have said here more than once, the daily news about oil inventories, demand levels, even pipeline attacks isn’t nearly as important as the valuation of the dollar. (And no, it’s still not because of the evil speculators.)
  • The reason is simply that when traders have lost confidence in the stock market, they fly to the safety of commodities, energy and gold. When confidence returns, they fly right back out and look for bargains in the carnage they just left behind.
  • In short, what we have here is a trader’s market. The fundamentals have been thrown out the window, and now it’s all about herd mentality.
  • That makes it a particularly dangerous market for longs like you and me. If you’re not a very active trader who’s on top of every move, you’re going to take some hits. And if you’re not such a trader, you’re going to get killed if you try to play it.
  • Your best strategy is to simply stay the course. I have no doubt that my long term theses are still solid. Energy, commodities—particularly agricultural commodities—and gold are still the right place to be for long investors, and I don’t see that changing for several years…not until global peak oil is clearly behind us, and the consequent global recession sets in.
  • But you have to have a strong stomach in a market that has simply lost its mind. When chaos is happening all around you, there’s nothing harder than standing your ground.
  • And times like these, when the trendlines have returned to their 200 dma’s and the whole sector that you know is right for the long term has been sold off, are ripe for bargain hunting.
  • Just don’t try to be a hero. Watch the important support levels closely and choose your buy points carefully. Be patient. Accumulate your favorite long positions-and a few shorts for good measure, like SKF and FXP-gradually. And then hold them and hold on.
  • The commodity boom is far from over, and the panic over energy supply and a fundamentally unsound US economy will always return after these bear market rallies. This Tuesday’s selloff destroyed half the gains or more in the financial sector over the last three weeks. And today, the bears are out in force, driving the major indexes lower while the gold/commodities/energy complex charges back up. (See my past articles for stock picks in those sectors.)
  • Likewise, the correction in oil will overshoot, as it always does, and then it will overcorrect to the upside again. I thought the new floor was around $120, but it could be $110, or it might even dip lower for a short while. But it will be back. I expect to see $150 again before the year is out.
  • I also expect this wicked volatility to increase as we make our way into the heart of this beast. Vladimir Putin isn’t done in his campaign to renationalize the resources of the former Soviet Union, oil and gas supply is still as tight as a drum, and there are still far too many mouths to feed. So take your Pepto-Bismol and hold on tight.
  • When the markets finally come to their senses again, your clearheadedness will be rewarded.

Wise words, some of the thesis we’ve mentioned before.

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