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Finally, the U.S. Paves Way for Sabine Pass

by | published April 18th, 2012

Last week, natural gas prices fell below $2 per 1,000 cubic feet for the first time in a decade. Let’s talk about what that means for you, as an investor.

The oversupply of natural gas continues to swell thanks to breakthrough technologies in fracking and horizontal drilling that “unlocked” this huge swath of energy. Tack on that local U.S. demand has been limited by an unseasonably warm winter, and you get the unsurprising dip in gas prices.

Meanwhile, in Europe, prices are near $11 for the same quantity, and $14 in South Korea, an important hub to the Asia-Pacific markets.

But with no (legal) way to export liquefied natural gas (LNG) from the Lower 48 to these energy-starved markets, there’s no opportunity to remove the heavy glut of gas, much of which has been consigned to storage all across the country.

Well, that’s going to change over the long term, with a groundbreaking moment coming in July.

For the better part of a year now, Kent has been talking about Cheniere Energy’s goal to become the first U.S. exporting facility with its Sabine Pass terminal in Texas and Louisiana.

So you shouldn’t be surprised that yesterday the Federal Energy Regulatory Commission approved Cheniere’s plans for a 500-acre, $10 billion export facility. The company will begin construction in July.

Meanwhile applications for seven other exporting facilities throughout the U.S. are pending.

Should the FERC approve them all, the United States could end up exporting one-fifth of its current natural gas production. And given what we’ve seen in other commodity markets, a shift in the market-demand curve will transpire… in a big way.

This would be another major step in a reversal for the natural gas prices over the next few years.

A Slow, Steady Process

Prices are not going to double overnight.

And we’re still witnessing a slowdown in wellhead production as natural gas producers shelve drilling around the country. Every week we’re hearing on CNBC that prices are finally “bottoming out,” only to see them decline another 15% to 25%.

Well, turn off the television.

Instead, step back and look at the big picture. Think four years out.

Natural gas is fast becoming a central cog in a larger part of our energy structure. Demand is expected to rise significantly, all around the world in the coming decade.

And if you’re interested in investing for the long term, here are the three things you need to know moving forward.

1) Natural Gas is the Pure Alternative to Coal Power Plants

With the damage from the Japanese earthquake, we’ve seen that governments are now wary of nuclear power. Meanwhile, in the United States, we’re shutting down coal-fired plants for environmental reasons. But we still need power, and lots of it.

That’s because, by 2020, more than 90 gigawatts (GW) of electricity generation will come offline. Most of this reduction will be from the retiring of aging coal-fired power plants.

Ninety GW is an immense amount of power. And it won’t be easy to replace – at least, not without reliable sources on hand.

Sure, the United States will likely see an increase in solar, wind, geothermal, and other “green” sources. But we have to be rational.

Green energy cannot replace such an enormous amount of power, unless we learn to somehow bend the laws of thermodynamics, and soon.

There’s only one feasible answer: The country will turn to natural gas to fill the void. It’s cheap, efficient, and there’s a lot on hand.

Kent currently estimates that new natural gas plants would account for 1.2 billion cubic feet (BCF) per day of additional natural gas usage.

2) Natural Gas is the New Industrial and Transportation Fuel

At the moment, greater usage is being made (and even more so in the future) of natural, rather than crude oil, as feeder stock for the production of petrochemicals.

Yet as the price of crude oil rises, and regulations target carbon emissions, companies will look to natural gas a lower-cost alternative.

There’s also the continuing shift toward compressed natural gas (CNG), liquid petroleum gas (LPG), and liquefied natural gas (LNG) to replace diesel as a transport fuel, with further movement into lighter engines (not just trucks) coming down the road.

Companies like Clean EnergyFuels (Nasdaq: CLNE) and Westport Innovations (Nasdaq: WPRT) are leading the transition toward natural gas fleets, fuel stations, and other transportation advances. And more is expected…

3) Export Terminals Will Change the Game

In the end, international demand for natural gas will be the game changer for U.S. producers.

An energy-starved world is hungry for cleaner, safer, and cheaper sources of power, but European nations are effectively banning fracking and drilling for gas because of environmental concerns. They’re also shutting down nuclear plants, and turning away from coal.

It’s creating a nice marketplace for U.S. producers.

U.S. companies are fully prepared to begin transporting LNG to foreign customers, especially as domestic prices hit rock bottom.

These companies are setting the stage and guaranteeing these customers long-term supplies. This stage began to boom last year and will likely dominate the news cycle well into 2014.

Now remember, no LNG will actually move out of its terminal atSabine Pass until 2014.

But when these exports do begin, we’re going to see the price of natural gas start to take off.

Once these companies prove they are capable of exporting without any hiccups, and the full supply chain is working in unison, then we will see natural gas demand reach far higher levels than we see today, and a more reasonable balance in prices among spot markets around the globe.

Given current market conditions and these four demand sources, late 2014/early 2015 appears to be the time when the LNG markets will be in full swing.

Natural gas is low right now, and it’s creating a long-term investment opportunity for those patient enough to let the markets and its players change the energy game over the next decade.

Sincerely,

James

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  1. Jim O’Dea
    April 18th, 2012 at 12:46 | #1

    So James, please tell us about the other 6 applications for exporting facilities throughout the U.S. that are pending – who are the companies behind the applications – who should we be buying besides Cheniere Energy.

  2. Harry Freedman
    April 18th, 2012 at 13:51 | #2

    Please explain petrodollars and how they affect oil trading.What are the chances that the weak dollar will force countries to trade oil in other currencies? What would happen to the U.S. economy?

  3. Robert Berke
    April 18th, 2012 at 14:42 | #3

    Kent: How do you think the following report from Reuters is likely to effect CHK?

    4/18 Chesapeake CHK -5.13% shares fell 8% following a report that CEO and Chairman Aubrey McClendon has borrowed $1.1 billion from the company over the past three years using a personal stake in the Chesapeake’s oil and gas wells as collateral.

  4. April 18th, 2012 at 20:40 | #4

    I’m still concerned about the recent drop in WPR’s price. Wha’ hoppen? It was doing VERY well, and then it just flopped. I was dumbfounded, to say the least; a nice gain just disappeared and became a (paper)loss. Now it seems to be making a slow recovery. I’d really appreciate your comments.

  5. Joel From Canada
    April 19th, 2012 at 05:23 | #5

    I’m also in awe regarding Westport’s recent drop. Their numbers have been on a steady consistent climb at a sustainable pace. I cannot see a reason for the drastic daily drops of as hi as $4 and change. Kent, your insightfulness would be greatly appreciated. Thanks.

  6. Woof
    May 2nd, 2012 at 04:41 | #6

    Can you explain: You state “But with no (legal) way to export liquefied natural gas (LNG) from the Lower 48 to these energy-starved markets, there’s no opportunity to remove the heavy glut of gas, much of which has been consigned to storage all across the country.”

    Why or how is there “no legal way” to export LNG? Is this again a bureaucrat tie-up ? Or another “environmental study that is completed as sloooooowly as possible?

  7. Mike Mann
    May 2nd, 2012 at 09:03 | #7

    @Harry Freedman

    Will gladly answer that question.

  8. Mike Mann
    May 2nd, 2012 at 09:07 | #8

    Woof: To answer your question, the “legal” is essentially a tongue-in-cheek remark on the slowness of this process. If someone had the ability to convert LNG and then ship it out of the states, they’d be breaking US and global trade laws. Right now, there is a process to the LNG export trade for the U.S. It needed to get approval from several agencies including the DOE and the FERC. The FERC was the most recent, which allowed them to break ground and expand the current plant. Rulings and studies take a while to complete… so yes, there are tie ups and long-wait times for these annoucements.

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