The argument against exporting natural gas is that a combination of oversupply, weak demand and low prices is encouraging developers to consider foreign markets. Asian and European natural gas is running about $10.00 per mMbtu and the U.S. Henry Hub (the pricing point for U.S. natural gas futures contracts) is settling at something like $4.30 per mMbtu. If you do the math, it's a no-brainer.
Here is a surprise: According to the Energy Information Administration (EIA), the price for natural gas in the U.S. is also about $10.00 per mMbtu. The EIA reports that the average residential prices for natural gas over the last six months were $10.71, $9.88, $9.79, $10.00, $10.21, and $11.02 (all per mMbtu). To capture these prices, no additional infrastructure is required.
Yet, Cheniere Energy Partners (CQP) planning to spend $6 billion to modify its liquefied natural gas (LNG) import terminal in southwestern Louisiana to export natural gas for the same price. The key word Cheniere is using is "planning" to spend, not "committed" to spend. They are not committed because they do not have the money.
Except for the large integrated oil companies, most energy companies do not speculate; they hedge. Since Cheniere Energy Partners is not a large company, it will require outside financing to build a facility 2x its market capitalization. At present, the company is not earning any profits; revenues have plunged and net earnings are in the red. Worse, there is no equity; shareholders are underwater. Its single asset is a LNG import facility and that treasure is expected to see little business for the foreseeable future. While the import facility's book value may be over $1 billion, its market value is not.
It is clear Cheniere Energy Partners has a serious revenue problem, which has been caused by too much natural gas in the North American system. There is no need to use Cheniere's import facilities. It is also clear that Cheniere Energy Partners' affiliate, Cheniere Energy Inc. (LNG), is facing similar challenges. (More than 90% of Cheniere Energy Partners is owned by Cheniere Energy Inc.)
Therefore it appears that Cheniere must build an export facility to save its company. Without a reliable source of revenue, the company will simply wither away. Of course, any bank financing a new facility would be aware of Cheniere's problems and would do everything possible to protect its investors, including securing special rights over Cheniere's shareholders and demanding a rock-solid hedge (a buyer that is a sovereign entity or a company as big as a sovereign entity) is in place before a dime is invested. The buyer must be willing to absorb most of Cheniere's risk. Cheniere's natural gas supplier must be a bankable entity that is willing to take on the balance of the risk.
One obvious buyer that could satisfy Cheniere's bankers is a European country like Germany. Germany needs new sources of primary fuels as they retire their entire fleet of nuclear power plants. But, it is not clear Germany needs to pay Cheniere a premium for natural gas.
It turns out Europe also has new discoveries of shale gas. The EIA puts the volume of its recoverable shale gas at 17.5 trillion cubic meters. With some 5.3 trillion cubic meters of shale gas, Germany's neighbor, Poland, has the biggest reserves. But, it gets better for Europe. When I asked him about this, Jeff Brown, principal of Pangea Global (based in Haymarket, Va.), said, "It is not just Europe's newly discovered shale gas; it is also a new pipeline from Iraq and Georgia that provides Europe with additional energy supplies and energy security."
The new pipeline is called the Nabucco Gas Pipeline, and it claims to be the "gas bridge between Asia and Europe." Brown points out that a critical concept behind Nabucco is to provide Europe with new source of natural gas from Iraq as well as perhaps Qatar and other gas rich countries.
While this may be an opportunity for Europe, it is a challenge for anyone trying to import LNG from North America. The production cost of American natural gas is relatively high; it is the cost of the natural gas, plus the cost to liquefy, plus the cost to transport and finally the costs to for the regasification process (in which the LNG is unloaded and stored in insulated tanks at the proper atmospheric pressure). In contrast, the delivered cost of pipeline gas is much lower and much more efficient.
Europe should not be dismissed as a potential market for natural gas; it is in Europe's interests to secure a diversity of supply. But, going forward, Europe has many more choices and it will not be as profitable as some LNG exporters expect.
Perhaps this explains why Cheniere is in discussions with Petronet LNG, India's biggest importer of liquefied natural gas. But India is geographically closer to the Middle East than to the Gulf of Mexico. How does Cheniere expect to compete against Qatar? They only way they can compete is to take a big hit in its gross margins, and their bankers may not let that happen.
Exporting natural gas from America's west coast to the Asian LNG market makes some sense. Alaska has been doing it for several decades. Developers could replicate Alaska's success anywhere there is economic supply. And there is a lot of economic supply in places like Peru.
But, to export from the east coast or gulf coast to Europe, Asia or India does not make economic sense. Further, companies entering a market knowing they can never be a cost leader are looking for trouble. It is for this reason that talks about Dominion Resources (D) considering the LNG export business should be taken with caution.
It is difficult to see a winning position for Cheniere's shareholders. If Cheniere does not build the export facility, the company withers. If it does build the export facility, Cheniere's bankers will step in front of the shareholders. So it seems like a no-win for shareholders.
If LNG investors are looking for a game changing play, the most interesting one is Clean Energy Fuels (CLNE). This company's objective is to provide natural gas for North America's transportation sector by deploying LNG and compressed natural gas (CNG) stations across the nation. Not only are LNG and CNG cleaner-burning transportation fuels, they reduce America's dependence on foreign oil. And the transportation sector is America's largest consumer of foreign oil.