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The Natural Gas Budget Shortfall

by | published May 4th, 2012

Kent is here in Baltimore busy shooting an upcoming project with Money Map Press Chief Investment Strategist Keith Fitz-Gerald and author Chris Martenson. He asked me to step in and supply today’s OEI column.

And I knew immediately what I wanted to write about.

See, right now, state policy leaders around the country are coming to realize the long-term importance of exports to the health of their economies.

They’re struggling to pass their 2013 budgets this year.

The recent 10-year low in natural gas prices and massive glut of supply are doing more than just hamstringing production around the country. It’s also slashing government budget forecasts due to the loss of tax revenue associated with natural gas sales.

So much so, that states are predicting steep decreases in revenues through 2014.

USA Today reported this week that “energy-producing states are bracing for lower tax revenue from the plummeting price of natural gas, which is just above half of what some states forecast when they put together budgets for 2013 and beyond.”

Low natural gas prices could cost Wyoming $125 million next year, and that the state will likely have to enact budget cuts of 8% for the year 2014 if prices don’t recover by then. In Oklahoma, just a $1 drop in the gas price leads to a roughly $70 million shortfall for the state each year.

It’s a staggering figure.

But Oklahoma Treasurer Ken Miller states that the “free market” will work itself out over the long term and natural gas prices will rise, particularly as large-scale coal-fired power plants convert to natural gas use.

More on that in a second.

As we’ve said before, the price rebound is inevitable. But we have to look at how we got here and where we’re going to profit from these state shortfalls.

First, the major technological breakthroughs in fracking and horizontal drilling have significantly increased the amount of unconventional resources available around the country. So much natural gas has been produced, combined with an unseasonably warm winter, that natural gas prices have slumped significantly.

This has naturally affected producers in the short-term, although midstream storage and pipeline companies remain healthy due to their contract structures as value chain suppliers.

But low natural gas prices won’t last forever. Over time, we’re going to see prices begin to rise for four reasons.

Natural Gas Prices: States Fight Against Time

The first, as Miller mentioned, are power plant conversions. As for the other three, I covered them in February. At the time I wrote:

“By 2020, more than 90 gigawatts (GW) of electricity generation will come offline. Most of this power reduction will come from the retiring of coal-fired power plants.

“Our current estimates show that new natural gas plants would account for 1.2 billion cubic feet (BCF) per day of additional natural gas usage.

“The second and third demand factors also come from companies using natural gas as a replacement for conventional fuels.

“At the moment, greater usage is being made (and even more so in the future) of natural gas as feeder stock for the production of petrochemicals rather than crude oil. Yet as the price of crude oil rises, and regulations target carbon emissions, companies will look to natural gas a lower-cost alternative.

“Finally, international demand for natural gas will be a game changer for the U.S. markets.

“Like the United States, foreign countries are transitioning their economies away from coal-fired and nuclear power plants. An energy-starved world is hungry for cleaner, safer, and cheaper sources of power. U.S. companies are fully prepared to begin transporting LNG to foreign customers, especially as domestic prices hit rock bottom.”

This stage began to boom last year with Cheniere Energy Inc.‘s (AMEX: LNG) announcement of the Sabine Pass terminal, which was just cleared for construction by the FERC last week.

As greater quantities of natural gas are transported out of the U.S., we’ll witness a shift in the demand curve, as new customers in energy-starved countries (England), countries where fracking has been banned (France), and countries with exploding populations (India) begin to import LNG.

That will have a strong impact on prices and production margins for producers and drillers.

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

By then, states across the country will be happy to see that additional revenue back on their books. But, unfortunately for them, they can’t capitalize on production the way that investors can, with natural gas prices near record lows and poised to break out.

The long-term situation is very promising, and the obvious reason why Cheniere Energy (AMEX: LNG) remains one of the core holdings in the Energy Advantage
portfolio.

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  1. Mike
    May 4th, 2012 at 12:47 | #1

    Do you think this current dip in oil to around $97-$98 is the start of a drop much lower? How low do you see it going?

    Or….do you see this as temporary and prices returning to north of $105?

    We are involved in a play in the Unitah Basin and receive royalties.

    Thanks!

  2. John W. Hardy
    May 4th, 2012 at 13:15 | #2

    On receipt of the summer, dramatic increase in energy stocks, I purchased calls as advised. I had seen some evidence of a turn around with the declines, but that has evaporated. The last few trading days has reduced the value of my portfolio to less than half. It has been breathtaking.

    I know that Mr. Fitz-Gerald has his Geiger program with its astounding results. Does he disclose to you that there has been a dramatic divergence (due to recent events) of the potential for a good run up of energy stock prices in the near future. Some of us could use some reassurance. The anxiety of losses of $5,000.00 dollars per day is devastating.

    I am 85 years old, a Ph. D. in math and physics at Stanford, now needing a new source of money (retired with the state of California managing the retirement funds). So, I am between a rock and a hard place. This is a time when good, young scientists are looking for work.

    J.H.

  3. John W. Hardy
    May 4th, 2012 at 13:27 | #3

    May 4th, 2012 at 13:15 | #2
    Reply | Quote

    On receipt of the summer, dramatic increase in energy stocks, I purchased calls as advised. I had seen some evidence of a turn around with the declines, but that has evaporated. The last few trading days has reduced the value of my portfolio to less than half. It has been breathtaking.

    I know that Mr. Fitz-Gerald has his Geiger program with its astounding results. Does he disclose to you that there has been a dramatic divergence (due to recent events) of the potential for a good run up of energy stock prices in the near future. Some of us could use some reassurance. The anxiety of losses of $5,000.00 dollars per day is devastating.

    I am 85 years old, a Ph. D. in math and physics at Stanford, now needing a new source of money (retired with the state of California managing the retirement funds). So, I am between a rock and a hard place. This is a time when good, young scientists are looking for work.

    I have centered my activities on recommendations made by money market press advisors. It would be useful at some more abstract level to have consensus comments about the markets. I have taken recent (unstated but implied) advice that XOP not going to decline much to imply at least a sideways movement in the oil market. But, I am mystified by the recent two-week decline in gasoline prices where I live while the WTI was increasing. That is inconsistent with months of a positive relationship between the two prices. It would be nice to know that this change of behavior has something to do with a problem that developed in Cushing.

    J.H

  4. Greg Olson
    May 4th, 2012 at 14:23 | #4

    Anyone remember when Cheniere Energy was going to be a BIG winner for stock holders by importing “cheap” LNG? Now they are going to be BIG winners by exporting LNG. I wish these stock market writers would make up their minds.

  5. Bill
    May 4th, 2012 at 15:45 | #5

    I notice Cheniere’s LNG export timetable calls for construction to begin this quarter of 2012 and first operation in 2015. This is a pretty stretched out schedule, it should be possible for Bechtel/Cheniere to get the first train in production in well under two years from start of construction.

  6. Sumflow
    December 6th, 2012 at 23:53 | #6

    Greg Olson :
    Anyone remember when Cheniere Energy was going to be a BIG winner for stock holders by importing “cheap” LNG? Now they are going to be BIG winners by exporting LNG.

    A. All things change..

  7. Sumflow
    December 6th, 2012 at 23:58 | #7

    Bill :
    it should be possible for Bechtel/Cheniere to get the first train in production in well under two years from start of construction.

    A. At what cost, if NASA did it it might be completed in under a year. But try to get the permits for a private company. If you live long enough you will get the dividends, relax. Things could change.

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