Since last year, the United States has produced enough natural gas to meet its needs; the Commodity Investor investigates the circumstances that led to this situation and what the repercussions may be.
The natural gas market has been facing a generational shift over the last several years. A technological revolution that began in the United States has unlocked billions of tons of previously unreachable natural gas, both in the US and abroad. These technological improvements are signs of a paradigmatic shift in the natural gas industry, and that shift is having repercussions on the energy industry globally. In this week’s report, the Commodity Investor examines this technological revolution and its deep impact on the natural gas industry.
Technology at work
During each major election cycle, politicians promise to make the US energy independent — well, in the case of natural gas, politicians no longer need to make that promise; last year, the US became self-sufficient in natural gas production and consumption. In 2011, 94 percent of the natural gas consumed in the US was produced domestically. That is an incredible development, especially considering that wasn’t even close to being the case only a few years ago. So what exactly happened?
At the turn of the century, energy companies invested heavily in research and development programs aimed at helping extract the maximum amount of fossil fuels from the earth. After lots of time and resources spent, the industry finally began to see tangible results. Thanks to a combination of horizontal drilling and hydraulic fracturing, it became possible to reach large amounts of natural gas trapped inside shale formations. These formations were previously unreachable and uneconomical to produce, but thanks to technology, shale gas became an economic reality and a force to be reckoned with in the global market.
Partly due to the discovery of shale gas, natural gas prices began to plummet. A real avalanche of shale gas began flooding the market and Henry Hub prices dropped from $14/mbtu to a low of $2/mbtu. The repercussions were multiple: the US became a natural-gas independent country; prices for consumers dropped; electric utilities began switching to cheaper natural gas and away from coal; and global natural gas prices began to drop.
Prior to the discovery and expansion of shale gas, a significant number of countries had drawn up large plans to create export facilities for their natural gas — that includes countries such as Australia and Angola. However, the advent of shale gas led many companies to rethink these plans. Australia was so bullish about being able to supply its Asian neighbors with natural gas that it made plans to create five mega export facilities that would cost billions of dollars each to construct and operate. But the prospect that the US might become an energy exporter has led Australian companies to revisit these plans and scale back their ambitions and profit expectations.
In the pre-shale world, Australian executives were licking their chops at the prospect of being able to supply Japanese electric utilities and Chinese power companies with Australian natural gas at a premium. However, the possibility that the US may become an exporter to Asian consumers has placed Asian consumers in a position of strength since their natural gas options just increased.
While the shale gas in the US has broken domestic natural gas prices, it is the prospect that the US may become a net natural gas exporter that has global producers worried. And all signs point towards a revival of the natural gas export machine.
Benefiting from US exports
Only a few years ago, America was preparing to become a large natural gas importer — the country’s industry built import facilities that could accommodate up to 100 billion cubic meters of natural gas imports per year. Today, the country imports roughly 20 billion cubic meters. As a result, it is in the process of converting these import facilities into export facilities — and that is where the investment opportunity lies.
Now that the US has become natural-gas independent, it is looking to become a net exporter of natural gas to consumers around the world. Over a dozen LNG export projects have been submitted to the Department of Energy for approval. One company that is leading the charge and that may become one of the leading exporters of American natural gas is Cheniere Energy Partners (AMEX:CQP). Cheniere already owns three LNG export terminals that have a capacity of 10 billion cubic feet per day, and it is looking at expanding its presence.
Cheniere is building one of the largest export facilities in North America at Sabine Pass, between the Texas and Louisiana border. The company is in the process of getting all the environmental and regulatory licenses to create this export behemoth. In addition, it is in talks with key customers, such as Japan and Korea, to enter into long-term supply contracts, thus securing a steady stream of cash for its natural gas exports. Blackstone Group and the Government of Singapore Investment Corporation are already investors, and this could be the right time for individual investors to get in on the action as well.
Securities Disclosure: I, Amine Bouchentouf , hold no positions in the stocks mentioned.
Columnist Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the bestselling Commodities For Dummies, published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities.