What to Do With Liquid Natural Gas

 | Apr 23, 2012 | 5:30 PM EDT  | Comments
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Stock quotes in this article:

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cqp

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The story of natural gas in the U.S. has a few twists and turns. Just a few years ago, there was serious concern about chronic shortages. Then shale gas flooded North America with more gas than most experts thought was possible. Now U.S. companies are looking to export surplus gas to faraway nations. But those companies may be in for a big surprise.

When pipelines are not practical, the most economic means to transport natural gas long distances is to convert it to liquefied natural gas (LNG) transport it via ships, unload, re-gasify and ship via local pipelines. Each step is costly, making LNG the least-preferred method of transport. Only countries with inadequate international pipelines will use LNG to export or import natural gas.

The U.S. is short international pipelines and they were building several LNG import facilities in the Gulf of Mexico and the East Coast. According to Natural Gas Intelligence, as of 2006, the U.S. had five operating LNG import terminals. In addition, there were 17 proposed LNG import terminals, which have all been approved by regulators. In 2006, America was gearing up to pay foreign countries, like Qatar, $12 to $15 per million British thermal units (MMBtu) or more to power its economy.

Canada, Europe and the U.K. are also short international pipelines. During peak periods, they need LNG to meet peak demand. They also built LNG import facilities and planned to build more.

Asia has been viewed as a region needing much more natural gas and it is short pipelines. Japan has a heavy reliance on natural gas. Since international pipelines cannot reach Japan, the country relies on LNG to meet all of their natural gas demands. Japan is reportedly paying $14 per MMBtu or more for natural gas supplies.

In fact, producers looked at Asia as their prime opportunity to sell natural gas. Suppliers like Qatar, Australia, and even North America saw Asia as a hugely profitable market. At prices of $14 per MMBtu or more, suppliers were salivating over potential profits.

Qatar is the current volume leader. They also are the world's cost leader. Soon they will be displaced by Australia. Royal Dutch Shell (RDS.A) has committed to a huge investment to build, own and operate a first-of-a-kind Australian offshore LNG production platform that will rival Qatar's facilities. Shell's market focus is India, China, Japan and other Asian consumers.

Canada is joining in and competing for the same market. They plan LNG export facilities on the Pacific coast of British Columbia.

In the Gulf of Mexico, Cheniere Energy Partners (CQP) is forging ahead to modify their import facilities to export LNG. In Maryland, Dominion Resources (D) is considering the same strategy. Other U.S. import facilities may also be scrambling to finance construction of additional export facilities. But to build an export facility would require multi-decade off-take agreements at favorable prices.

It is not clear that LNG prices will remain elevated. Presently, there may be too many suppliers queuing up. Pre-liquefied natural gas prices are declining. Today, natural gas is trading at about $2 per MMBtu at Louisiana's Henry Hub.

But, there's a new twist. Some very large LNG customers are about to exit the market.

China just discovered vast amounts of shale gas. The U.S. Energy Information Administration estimates China has approximately 1.3 quadrillion cubic feet of untapped shale gas. By comparison, the U.S. has approximately 0.86 quadrillion cubic feet.

China is moving quickly to gain access to their new resources. China National Offshore Oil Corp (CEO) has already begun drilling their first shale gas project in the country. Chevron (CVX) is exploring for shale gas in the Qiannan Basin with their partner, Sinopec Shanghai Petrochemical (SHI). Royal Dutch Shell and BP (BP) are not far behind; they are said to be aggressively seeking other Chinese partners.

The action is not limited to China. India's Oil and Natural Gas Corp. signed a deal with ConocoPhillips (COP) to explore and develop shale gas reserves in India. Chevron, Talisman Energy (TLM) and Eni SpA (ENI) drilled 14 shale gas exploration wells in Poland, while another 39 are planned for this year.

It is a mistake to assume shale gas is only a North American phenomenon. It is being found all over the world and in great quantities. Growing competition for a declining customer base means the plump margins LNG suppliers were expecting will likely become elusive.

LNG suppliers' losses are a nation's gains. Those countries discovering large reserves now have access to cheap energy to fuel their economies. Gas turbine companies like Siemens (SI) and General Electric (GE) should also see gains; their business should leap beyond their original plans.

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