Beyond the Default Mess, The Profit Potential Here is Huge

by | published October 8th, 2013

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.

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  1. T.D.
    October 8th, 2013 at 14:29 | #1

    “Default”….hmm, that would be our inability to pay the interest on our humongous debt…the treasury takes in monthly far more than is necessary to make those interest payments. So default is not likely unless Obama chooses in his infinite wisdom as the son of a Kenyan goat herder to defy US law and not make those interest payments…then again he is fond of breaking everything from his oath of office to his promise of a unifying political tone.

  2. Dom Brunone
    October 8th, 2013 at 15:07 | #2

    TD, you hit the nail on the head. Financial Analyst Gary Halbert says today in his newsletter that Treasury revenues are up to $200B this month, while the amount needed to service our debt is only $25B. President Obama is throwing a childish temper tantrum because he can’t get his way. We need to react the same as we would in a domestic setting: ignore the petulant child and go on with business. Besides, he’s only doing this because he acted like such a woos on Syria.

  3. Guest
    October 8th, 2013 at 15:29 | #3

    The Kenyan is already showing his hand. He is inflicting maximum fear and pain on the citizenry for the “government shutdown,” despite the fact that 83% of the federal government is NOT shutdown. He’s closing parks, federal websites, open air memorials, even private homes and business on federal lands. He is not worried in the least about default. All part of his “fundamental transformation of America.”

  4. Dan VB
    October 8th, 2013 at 17:47 | #4

    It’s disturbing to me that you don’t seem to understand that defaulting on the budget cold only happen if Obama chooses not to make the interest payments. The government takes in almost 10 times the funds that it needs to makes those payments, so suggesting that we would default if the 17% of the government is still shut down is irresponsible.

  5. fran
    October 8th, 2013 at 18:02 | #5

    OMG….I think u nerds must be the original WASPS that the foundation of a ridiculous financial system was built upon…..kenyan…how childish! I usually feel comments are useful however yoyrs gave wasted my time

  6. yngso
    October 8th, 2013 at 18:13 | #6

    “The Kenyan”…whatwever you think of Obama, that kind of talk doesn´t help. He´s an afro-white Hawaiian. That should be something wonderful in your diverse nation. His father wasn´t a goatherder, but highly educated. MMP, why do you publish this kind of tripe?
    To the subject: Heavy road vehicles need to tank natgas very often. Stopping and tanking requires time and energy, so it´s probably not the best for long-haul, but UPS delivery vehicles etc and ferries that only cover a short stretch of water can fill between each trip.
    LNG export from the US start very soon, before Vaca Muerta and lots of other fields, also in Asia, start producing.
    Dr M., do you think the Russians are stupid? You, of all people, should know. Europe gets lots of natgas, not only from Russia, from closer to home. Gazprom can adapt to competition from over the Atlantic.

  7. Brad M
    October 8th, 2013 at 19:54 | #7

    I think there will be an over dramatized, final hour resolution passed. Unfortunately, part of this is just political posturing and tactic, and some of us are suffering the consequences. But, in the end, the can will just be kicked down the road until we have to deal with all this again. The US should definitely be able pay its debts. After all, the government has the legal right to print the currency or simply have the Fed create it ” out of thin air”. So US treasury holders should get paid back, just with a devalued currency. If the US does default, I seriously doubt it,life as we know it begins to change. We Americans had better get control of our government and financial system fast or prepare to live with far less wealth and freedoms.

  8. ak
    October 9th, 2013 at 13:40 | #8

    why the need to refer to obama’s lineage as “…son of a kenyan goat herder…” i happen to have been born in kenya and although i’m not offended i am surprised (or maybe i shouldn’t be) at you resorting to such vulgarity to get your point across.

    last i checked mr obama’s done quite well for himself not to mention he’s a two term president. what have you done other than live in your trailer and chew tobacco…?

  9. Jack Cunningham
    October 9th, 2013 at 14:14 | #9

    I’m confused. The US Gov. is in “Shut Down” mode right now. So does’nt it mean that it is spending alot less $ right now as long as it is “Shut Down”? Also, there is alot of $ coming into the US Gov. daily. Why then does it need to “Borrow” more when it’s expenses are so mush less????? So, should’nt the US Gov. spending be set, then we would know how much more – if any – the the US Gov. needs to borrow above the 15 trillion that it has already “Borrowed”? Is’nt that what Budgets are for?

  10. Karl Shaffer
    October 9th, 2013 at 21:11 | #10

    The US government hasn’t had a budget since the middle of Bush’s last term.
    We have only had continuing resolutions because the Democrates don’t want a budget. They just want to spend money without accountability. So, keep those printing presses going! And, no, we aren’t saving money during the shutdown —
    congress just passed a resolution that says that everyone will get paid during
    the shutdown. In fact it will cost more for all those federal police to go down to the mall to keep people from looking at those monuments that normally anyone can access at anytime for free! That is deliberate harassment of the people by the President and his cronies to be as obnoxious as possible, then blame it all on the Republicans (they disagree with us so they are the bad guys!)

  11. DJL
    October 12th, 2013 at 00:36 | #11


    It’s time you realised that the US is controlled by the Jesuits(Federal Reserve), and Obama.

  12. Kevin woods
    October 15th, 2013 at 20:04 | #12

    I think the congress and president should have to write the principals of lincoln on a caulk board a thousand times perhaps they would get an idea of what America s values should be , and how much we’ve lost

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