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Liquefied Natural Gas: The Forgotten Energy Boom
by: Andrew Mickey April 07, 2009
“See that field over there…by the ocean? That’s where it will be. These projects are going to bring prosperity to my country my American friend.”
That’s what my guide told me. I was in Papua New Guinea at the time looking into an energy boom the whole world seems to have forgotten about. The way things are shaping up, though, this is the time to start thinking about it again.
It’s going to be bigger (and more profitable for investors who pay attention) than almost anything else you’ll find out there in the energy sector.
Sure, government subsidies for solar and wind power will help get those sectors rolling again. And the potential for a “cap and trade” carbon tax system is turning eyes back to geothermal power. But there’s a bigger boom right under our noses. It’s one that doesn’t require any government support. This one is going to be big – real big.
Cambridge Energy Research Associates (CERA) says it’s “the next truly global energy business opportunity.”
John Gass, a division president at Chevron (CVX), says this boom is “all but inevitable.”
Daniel Muthmann of E.On AG (EONGY.PK), a $56 billion European energy/utility behemoth, says there is a “tidal wave” on the horizon.
Like I said, it’s going to be big. More importantly, it has been almost completely forgotten about. Just look at who’s talking about it above. These folks aren’t exactly the Buffetts and Roubinis of the world. They can’t move markets with a brief statement. They’re energy insiders. And they see what’s coming.
I’m talking about liquefied natural gas, or LNG.
Cleared for Liftoff…Finally
LNG has the potential to change the world’s energy landscape. As with all changes, there will be great opportunity and equally great risk of loss. For those of us who are getting prepared now, we’ll get the former and avoid the latter.
LNG is nothing new. It has been around for years. LNG is natural gas which has been chilled to the point that it becomes a liquid. In liquid form, it’s pumped onto specialized LNG tankers and shipped all over the world.
The LNG delivery process is pretty basic as well. It is first pumped out of the ground. Then it is transported to a liquefaction plant where the natural gas is turned into liquid form. It’s then shipped to one of the dozens of regasification plants around the world. There it is turned back into a gas and sent via pipeline to the end user.
The end result of this boom will make natural gas a truly global commodity. That’s a huge change for natural gas.
Before the downturn, natural gas prices were different in every major market. Natural gas prices peaked in North America around $14 per Mcf last summer, but hung around the $6 to $10 range leading up to the bubble. European countries like England and Spain had to fork over $10 to $15 per Mcf. Japan and China were paying $15 to $22 per Mcf of natural gas.
That’s a pretty wide range of prices for a commodity. Especially when you consider a pound of copper, an ounce of gold, and a barrel of oil are pretty much the same price around the world. The reason natural gas prices varied so greatly was because it was consumed primarily by the continent that produced it.
That’s all starting to change… rapidly.
Pipelines used to be the only way to transport natural gas. Now, with the growth of LNG, ships can carry it anywhere in the world. Natural gas is becoming a truly global commodity and the implications will be big.
That means natural gas demand from India and China will have an impact on prices in North America, and vice versa. As the LNG market matures, we could see global natural gas prices rise a good bit higher. That’s over the long-term though. Over the short-term, there is a much different story.
Global Gas Glut
The LNG market is still in its relative infancy. Last year less than 90 million tonnes of natural gas were shipped globally. To put that in perspective, it’s the equivalent of about 780 million barrels of oil. That’s less than 10 days of world oil consumption.
So to say the LNG market is pretty small is an understatement. There’s a lot of room to grow here. And it’s growing.
An additional six liquefaction plants will come on line by the end of this year. These facilities will produce a lot more LNG. Together they will nearly double global LNG production over the next few years.
For instance, the massive Sakhalin II project off the coast of Eastern Russia just shipped its very first LNG shipment to Japan a few days ago.
An expansion of the liquefaction plant in Indonesia is expected to come on line by the end of the year.
And then there’s the big one. QatarGas’ (DOH:QGTS) liquefaction facilities are going through a major expansion. This project will bring an additional 24 million tonnes of LNG on the market this year. That’s nearly a 30% increase in LNG supply overnight.
The key thing here is not how many facilities are coming on line; it’s where they are.
The Sakhalin Island in Russia has huge natural gas reserves. For years, though, they were “waterlocked” (the inverse of landlocked). There was no way to get the natural gas to end users. That is, until the Sakhalin LNG facilities started coming on line.
The LNG production facilities in Indonesia are important too. There has always been very little domestic demand for Indonesia’s natural gas. Indonesia is “waterlocked” too, except for Papua New Guinea to the East. Indonesia’s natural gas was stuck on the island. That is, of course, until LNG became a reality.
Finally, QatarGas is the big player. The Middle East has a lot of oil and it has a lot of natural gas too. Once again, domestic demand couldn’t soak up all the natural gas produced along with the oil. Pipelines to lucrative markets in Europe were too expensive to build. Qatar’s gas was unusable. Or rather, it was unusable until LNG came along.
That’s the key here. LNG is unlocking huge natural gas reserves around the world. Indonesia, Papua New Guinea, Eastern Russia, and all across the Middle East are now able to tap and sell their natural gas reserves. The gas can now be transported, relatively easily and inexpensively, to the markets with the highest bidder.
As you might expect, the ramifications of the ongoing LNG boom will be sizable. There will be some big winners and big losers. That’s why I’m recommending a slightly different strategy to capitalize on this boom.
The LNG boom has been put on the back burner by many investors. As we looked at last week, natural gas prices have fallen 75% in 10 months. Natural gas companies are shutting down production. The number of natural operating gas rigs has been halved. Technological development has made massive reserves in the United States economically feasible to tap into. There are a lot of negatives for natural gas in the near-term, but LNG is global. And we have to think globally.
The longer-term picture is much different. The economic downturn won’t last forever. The world is looking for energy sources cleaner than coal. The U.S. is about to change the economics of electricity production.
The LNG boom will have severe consequences for many natural gas producers. In North America, the prospect of importing more and more natural gas will force many marginal producers (like shale gas companies) to cut back production.
That’s why I recommend sticking to the “picks and shovels” of the LNG boom with your safe money.
The LNG boom has already begun. And it’s only going to get bigger. The companies which build the infrastructure to make LNG are going to do exceptionally well over the next few years.
When it comes to speculation though, there are some solid opportunities in small natural gas exploration companies. The companies which acquired natural gas reserves a few years ago picked them up for practically nothing.
Think about it. A natural gas field in the jungles of Papua New Guinea or Indonesia was pretty much worthless before LNG came into the picture. Now, those worthless reserves are worth millions – potentially billions. And they will only continue to increase in value as the world begins to realize how big LNG is going to be.
Above all, we can learn a lot from the imminent LNG. This is one of those stories which take a while to develop. LNG is not hot. We’re going to see 10% moves in a day. Frankly, it’s going to take a few years for the world to realize how big it is really going to be.
Wall Street hates that. It refuses to look ahead by more than a few weeks. But now, while the whole financial world is focusing on the bank problems or the nuances of the latest government bailout plan, there is opportunity for the rest of us to look ahead.
Entire industries don’t get turned upside down without opportunities to capitalize on it. I’m confident LNG will bring some prosperity to Papua New Guinea as my guide expected. Given the growth I expect in LNG over the years, it will bring some prosperity to us too if we’re patient and prudent. The LNG boom, and the massive opportunities which come along with it, are certainly ones to keep an eye on. And we will.