Beyond the Default Mess, The Profit Potential Here is Huge
With little action taking place on Capitol Hill, the possibility of a debt default edges closer to reality.
Barring a last minute compromise, the credit worthiness of the U.S. will collapse beginning on October 17.
Make no mistake: This is the real McCoy. If October 17 comes and goes without a resolution, life as we know it will suddenly change.
A default will cut through the economy like a laser, stop the recovery and reverse its trajectory in short order. The world-wide dollar panic that results will make the credit crunch of 2009-2011 look like a picnic, while causing significant long-term damage to the global view of U.S. investment markets.
What I find particularly disturbing about it is the posturing by some members of Congress, along with a few amateur commentators, that letting a default occur would be a good way “to teach the government a lesson.”
It reminds me of the guy who protested higher property taxes by burning his own house down.
As it happens, Marina and I will be in London on “default day” for a series of meetings to address significant changes in the wider energy market.
Once the political three ring circus moves out of town, what I learn from these briefings will hand us some fantastic new investment opportunities.
Here’s the silver lining that will be high on my list in London…
The 5 Drivers of the LNG Revolution
As we have discussed on several occasions, there is a revolution occurring on the demand side in natural gas. No fewer than five major advances are hitting that will ramp up the requirements for natural gas.
What’s more, the impact it will have on additional North American production will be far reaching. That’s a good thing, since we have far more unconventional reserves than initially estimated. In fact, this new demand is already being felt, providing a floor for ramping up drilling even further.
Four of these sources of new demand are domestic: the transition from coal to gas as a fuel of choice in the generation of electricity; rising use of gas as a feeder stock for petrochemicals; increasing industrial applications; and an accelerated expansion of natural gas as a vehicle fuel, especially in truck and transit fleets. There are even moves to use natural gas as a fuel in railway traffic.
However, it is the fifth source of new demand that is going to change everything. When it comes to how energy is moved, it is the single largest change to emerge in decades
I’m talking about the developing market for liquefied natural gas (LNG).
Of course, I’ve written about LNG in these pages before. It involves cooling gas to a liquid, allowing it to be transported via specially designed tankers. The advantage is that it affords a greater use of existing pipeline networks while also expanding the gas trade worldwide.
You simply liquefy the gas at a terminal on one end and regasify it at a terminal on the other.
The emergence of this trade will fundamentally improve the global energy balance and usher in an age of rapid unconventional (shale and tight gas, coal bed methane) basin development worldwide.
In the U.S., LNG exports will also soon comprise a major boon to increasing production without hammering domestic prices. Abroad these exports will become a life line.
Rapidly Expanding Markets Abroad
This is especially true in Europe where LNG imports are already establishing spot markets.
Spot markets involve short-term sales that are almost always at a cheaper price than long-term pipeline contracts. The beneficiaries are the end users on the continent, while the primary loser in this case is the Russian natural gas behemoth Gazprom.
This is because Gazprom operates on 20-year contracts that include two particularly disagreeable elements. The first that their price is based on a basket of crude oil and oil product prices. Given the high level of oil prices, that means the cost of gas thorough these has been continually rising.
The second are “take or pay” provisions each contract contains. These require that a customer take a specified amount of gas monthly (usually at least 70%), or pay as if they had.
Both of these factors are increasing the cost of natural gas substantially in Europe.
The good news for European consumers is that neither is involved in spot purchases of gas delivered via an LNG terminal. And that has prompted lots of people to watch the development of U.S. export potential with considerable interest.
But there is a much bigger story unfolding elsewhere. The demand for LNG in Europe still pales in comparison to the demands in Asia. Only a few years ago, Japan and South Korea comprised almost two-thirds of the international LNG demand market. These days with China and others quickly moving in, Asian LNG prospects are moving off the charts.
Two Big Wins For LNG Investors
That brings me to a couple of major developments in the LNG market that happened yesterday.
One reaffirmed that the Panama Canal expansions will be complete in 2015. This widening and deepening project will allow LNG tankers to move through the canal for the first time – making it profitable to transport LNG from Gulf Coast terminals directly to Asia. That will complement the already expected heavy traffic to Europe.
Second, we learned that the increase in LNG exports is hardly confined to new U.S Gulf Coast terminals.
Yesterday, Alaskan North Slope producers and TransCanada (NYSE: TRP) announced their intentions to build a Kenai Peninsula pipeline terminus and an LNG plant that could cost up to $65 billion. The project would move 3.5 billion cubic feet a day to the plant and produce upwards to 18 million tons of LNG annually. Almost all of it would be destined for Asia.
This project will benefit the huge Horn River and Montney shale plays in northern British Columbia and Alberta and will also provide a major outlet for the natural gas produced closer to the plant.
This is in the Cook Inlet area near Anchorage where I already have a major interest in what is going on because of the prospects for new multiple horizon pay zones there. Now, there is an additional outlet for the production those pay zones will deliver.
That will be of benefit to several dozen smaller American operators – providing us with some nice “sweet spot” investment moves with companies likely to provide even better profit margins than the big boys.
You can expect to hear more about these moves in OEI shortly
So things are looking up – even if the village idiots in Washington burn the house down.