Exports Fire up Miserably Low Natural Gas Prices

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Natural gas prices have traded in wild swings this year.  After hitting a low of $1.91 per million British thermal units the week of April 20, prices have recently spiked to above $3.50.

With the help of a few large commodity players – and the federal government – that number could jump drastically higher.  Between 2005 and 2011, natural gas production has risen 28%, a result of newer technology to extract gas from drilling sites.  The excess supply has reduced prices.  However, liquefying natural gas then exporting it overseas would both reduce U.S. supplies and earn U.S. drillers fatter profits.  A few firms are pioneering the movement.

A $65 Billion Play

Exxon Mobil (NYSE: XOM), ConocoPhillips (NYSE: COP), and BP (NYSE: BP) announced last week that they are bringing to life a larger-than-life, audacious goal.  According to The Wall Street Journal, the companies are:

Moving forward with plans to export natural gas from Alaska’s North Slope in a project that could cost as much has $65 billion.  the Alaska project is the latest sign of the transformation of the U.S. from a heavy energy importer into a major producer and likely exporter.

The move would see the players building plants that would convert natural gas into liquid natural gas (LNG).  Japan, Korea, and eventually China and India are the target nations, assuming the U.S. approves the firms’ request to export to countries without a free trade agreement with the U.S. 

While natural gas prices in the U.S. have plummeted, natural gas prices overseas can track and therefore bear a resemblance to oil.  Glamorous profits await the firms that can successfully export natural gas from the U.S., where it is drilled more easily, to overseas, where prices are higher.

Exporting would also increase natural gas drilling, which has fallen to the lowest level since 1999, amid low gas and high oil prices.  Recently, oil companies have shirked natural gas in favor of higher-priced oil.

Like Exxon, ConocoPhillips, and BP, Apache (NYSE: APA) and Cheniere (NYSEMKT: LNG) have also forayed into the space.  Apache is a producer of natural gas, and it has eyed a project in Kitimat, located in British Columbia – the company plans to export from Canada’s west coast.  To carry out a project like this, Apache must “invest a lot upfront just to pipe their gas to the coast before it even gets liquefied, providing even more incentive to demand oil-linked pricing,” reports WSJ

Unlike Apache, however, Cheniere’s expertise is moving natural gas.  Natural gas must be liquefied before it can be moved, and Cheniere liquefies natural gas and transports it.  Cheniere owns a number of “terminals,” which are used to import and export natural gas.  According to Motley Fool writer Robert Zimmerman, Cheniere is the only company that is permitted to build an export plant inside the U.S. 

Begging for Permits

If firms hope to export to nations that do not have a free trade agreement with the U.S., the Department of Energy must issue permits.  However, the group “won’t rule on any of the pending applications until the release, likely before year-end, of a twice-delayed report on the cumulative economic impact of greater natural-gas exports,” says WSJ.

If natural gas were to be exported, estimates say that up to one-third of stocks would be sent overseas.  The obvious result would be higher natural gas prices here in the U.S. 

The implication is that processes that use natural gas would become more expensive, forcing higher consumer prices, which could come in the form of increased textile prices and a boost in electricity costs.

Exporting natural gas would likely lead to higher prices in the U.S. and reduced prices overseas, as competition picks up.  The question is this: How can investors play this trade?  Trading natural gas is one potential way – however, buying one of the companies listed above, especially exporter Cheniere, would be a surefire way to jump in on any upside the company would have.


ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Apache, Bank of America, Citigroup Inc , Wells Fargo & Company, and ExxonMobil. Motley Fool newsletter services recommend Wells Fargo & Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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