The Natural Gas Renaissance
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Cheap, clean and abundant, natural gas is changing the way North America looks at energy. Depressed resource prices, currently hovering around $2.30 per million British thermal units, resulted in major players abandoning natural gas to focus their operations on the more valuable liquid plays. Chesapeake Energy (NYSE: CHK) and EnCana (NYSE: ECA), the second and third largest natural gas producers in North America have been very vocal in their efforts to move into more economically profitable markets like liquids.
Clearly, with over 100 years of supply based on current extraction technologies, which will undoubtedly improve with time, the supply curve has shifted left to the point where it is not profitable for companies to engage in extraction activities. However, cheap natural gas prices are encouraging power generation and transportation companies to reconsider their natural gas usage, creating a potential renaissance of natural gas technologies.
Power generation is expected to become heavily dependent on natural gas usage. Following the Fukushima nuclear meltdown, Cameco and other major uranium miners saw their share prices dwindle as nations swore off nuclear energy due to the inherent risks of the process. Fukushima actually played a minor role in the transition away from nuclear energy; the movement, especially in North Americam was evident before the disaster. According the U.S. Energy Information Administration, nuclear power plants are approximately 450% more expensive to construct, on a standardized per kilowatt of capacity basis. Compounded with cheap input costs, natural gas driven power generation is a much cheaper alternative for the utilities.
Several major American utilities are pushing forward with their natural gas ambitions; others, however, such as Dominion Resources (NYSE: D) will be expanding their natural gas-driven operations. Dominion is looking to double its gas-fired generating capacity by introducing two additional large scale plants.
Natural gas offers two primary advantages over other sources used for generating electricity. Compared to coal, natural gas combustion produces significantly less carbon dioxide, carbon monoxide and nitrogen oxide in addition to emitting a negligible amount of dioxide and particulates. Coal-fired plants are outdated and require substantial upgrades in order to achieve a marginal improvement in greenhouse efficiency. With Dominion and others shutting down their coal-fired plants, natural gas is transitioning to be the primary fuel source of choice, accounting for over 50% of the forecasted U.S energy growth over the next 20 years. Nuclear energy, on the other hand, is practically emission-free and much more efficient than all other energy alternatives. The primary downfall of the resource is, as previously mentioned, the high start-up costs of building reactors, resulting in a long payback period, and potentially regulatory hurdles associated with the industry. Changes in regulation have caused previously budgeted project costs to be revised as more expensive inputs are required.
High gasoline and diesel prices are another driving factor which has pushed natural gas based alternatives to come into the spotlight. Expected refinery constraints, growing diesel exports, geopolitical tension and increasing global vehicle ownership continues to exert upward pressure on refuelling costs. As the risk of military conflict between Israel and Iran increases, and Iran’s regular threats to close the Strait of Hormuz in response to international sanctions, oil prices are not likely to see significant downward movements within the upcoming years.
Natural gas, slowly, is becoming a feasible alternative to traditional gasoline and diesel. I have written extensively on Clean Energy Fuels (NASDAQ: CLNE), a leading provider of alterative vehicle fuels, which is currently building Americas Natural Gas Highway of 150 LNG fueling stations. As companies aim to adopt cleaner domestic fuels major automakers and engine designers are looking to expand the booming industry.
Although the energy source is primarily used for commercial transportation purposes, Ford, General Motors and Chrysler have introduced their truck lines which run on compressed natural gas. Before such technologies can be fully integrated with the general public, two limiting factors have to be addressed: fueling stations have to be readily available and engines need to be smaller and more economically affordable. Clean Energy Fuels is actively working to fix the first limitation, building out the infrastructure; 3M (NYSE: MMM) is working on the latter, creating a new product which will allow natural gas to be stored under higher pressures in smaller tanks. With major names on board, natural gas engines are becoming a feasible alternative to rising fuel costs.
Cheap natural gas is allowing the resource to be used in ways that were not financially viable at $11 per mbtu. The obvious concern, naturally, is if industries build up the demand for natural gas, how rising prices will affect the profitability of current projects.
Motley Fool newsletter services recommend Clean Energy Fuels, Dominion Resources and 3M Company. The Motley Fool has no positions in the stocks mentioned above. apinkasovitch owns shares of Clean Energy Fuels and Encana. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.