The Natural Gas Boom Will Help Investors If Policies Change
Erin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The U.S. Department of Energy has released a study that finds that allowing U.S. liquid natural gas (LNG) exports would help the economy. If LNG grows, so will the economy.
NERA Economic Consulting believes that the U.S. will “gain net economic benefits from allowing LNG exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased. In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports."
Is this announcement good news for energy investors? Well, yes and no.
In short, yes, the increase in natural gas and LNG will not only benefit the overall economy with cheaper prices to the consumer, and more trade and business, it will, in the long run, benefit investors. But there is a very large asterisk on this benefit. The NERA study indicates that the U.S. shale natural gas revolution, helped by improvements in hydraulic fracturing and horizontal drilling (fracking), can provide an even broader lift to our economy, IF the right policies are put in place. The problem is that those policies are not currently in place.
Chesapeake Energy (NYSE: CHK) owns 2.2 million acres of natural gas shale fields in the U.S. Right now gas sells for less than it costs to produce, due to a glut from last winter’s warmer temperatures. That is a temporary problem for a company like Chesapeake that has a lot available to drill. When demand increases, they will be able to meet it. But for now, it is not cost-effective to drill during the gas price slump.
As of right now, that demand does not exist. Almost all of the natural gas producers are sitting on large stores. But the glut was due to a geographic warming trend. The warm winter did not apply worldwide. So why don’t the gas companies export the excess?
The reason is because the U.S. exports very little natural gas, and what it does export, goes to Canada and Mexico via pipeline. To send natural gas anywhere else (Europe, India, Asia), requires turning it into LNG and putting it in a tanker ship. This isn't something all companies are equipped to do. In fact, there is only one LNG export facility in the U.S. and it is in Kenai, Alaska. ConocoPhillips (NYSE: COP) has sent small amounts of LNG to Japan via Kenai. Kenai was scheduled to be idled this past spring. But the LNG surplus came right as Japan needed more (due to the earthquake and tsunami) and the facility was put into use to fill the unique demand.
Obviously, other companies would like to be able to export extra LNG as well. However, this requires building terminals, getting permits from the Department of Energy, and much, much more. As of September 2012, 15 applications have been entered, and one had been approved- Cheniere Energy (NYSEMKT: LNG). Ironically, (or is it symbolically?) Cheniere was approved for an export terminal right next to its LNG import facility. Import? Yes. Cheniere built its facility several years ago when it looked like the U.S. would need to import LNG. It wasn't long thereafter that shale gas drilling took off, changing everything. The import facility now sits idled.
ExxonMobil (NYSE: XOM) has increased its activities in natural gas drilling. The company (according to its website) believes natural gas will be the fastest-growing major fuel between now and 2040, and now the NERA study backs up those findings. One of the ways that natural gas will be used is in fleet vehicles. With many states imposing cleaner energy requirements on local governments, natural gas fleet vehicles will continue to increase. According to Reuters, natural gas demand in fleet vehicles and large trucks could reach as much as 14 billion cubic feet per day come 2030. As of 2011, the rate was only 90 million cubic feet per day.
But, even with increased domestic use of natural gas, the real benefits to the overall economy will be if and when LNG is exported in large quantities. Even though domestic natural gas prices are affected by exports, the value of those exports also increase so that there’s a net gain for the overall economy, and serves a worldwide energy corporations (and therefore energy investors) well.
ErinAnnie has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts on Chesapeake Energy. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!