3 Things to Know About LNG Exports

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

There is far more to investing in natural gas and liquefied natural gas (LNG) than first meets the eye. There are at least these three important details to understand about the future of LNG before further investing.

As has been widely reported, the Department of Energy (DOE) gave conditional authorization for LNG exports to a second facility in the U.S. The Freeport terminal project will export up to 1.4 billion cubic feet a day (1.4bcf/day) of LNG. The approval allows for exports to countries outside of the free-trade agreement, including the high-consuming Japan. The Freeport terminal is a partnership between ConocoPhillips and several private investors. This approval has given hope to many that more authorizations are on the way.

Approval Not Guaranteed

However, it must be noted that a new DOE secretary was sworn in after the May 17, 2013 approval was granted, and he intends to change things. The new secretary, Ernest Moniz, said he will delay the final decisions on the 20 waiting applications for other export facilities until he can review impact studies on natural gas supplies and prices. Moniz said he hopes to conduct his reviews as quickly as possible.

Freeport LNG has signed preliminary 20-year contracts to sell much of its output to two Japanese utilities – Chubu Electric Power, and Osaka Gas – and to BP Energy. The project, which is expected to begin exporting in 2017, still needs approval from the Federal Energy Regulatory Commission.

The Freeport approval was the first approval granted by the DOE in two years. The last approval was for the Sabine Pass facility owned by the Cheniere Energy (NYSEMKT: LNG) subsidiary Cheniere Partners (NYSEMKT: CQP) two years ago. The Sabine Pass facility is expected to be operational by 2016. The processing plant will export 500 million cubic feet of gas a day (16 million tons of LNG per year). Cheniere expects to build five more identical systems by 2019. The $12 billion investment could export about 4% of America’s current natural gas output.

After Cheniere won approval for the Sabine Pass facility, the Obama Administration did an about-face on its own policy, resulting in a long delay in approving other applications for LNG export facilities. Meanwhile, companies like Dominion Resources (NYSE: D), which is now second on the waiting list, await approval.

Like Cheniere, Dominion Resources wants to transform an existing import facility into an export facility. Dominion is one of the nation’s largest producers and transporters of energy and operates one of the largest U.S. natural-gas storage systems with 947 billion cubic feet of storage capacity.

Dominion submitted a 12,000-page application to federal regulators to build a $3.4 billion plant in southern Maryland to export LNG. The company has deals with energy companies in Japan and India that would purchase the gas.

LNG Exports Are a Global Issue

The second important thing to know is that LNG exports will affect more than just the financial earnings of American companies and your retirement. Exports will help other countries get the access to needed resources. Don't be short-sighted with your investments and think of LNG in terms of U.S. supply and demand. Energy needs are growing around the world, including countries that cannot produce their own clean energy sources. The Ambassador from India, Nirupama Rao, wrote the following in an op-ed for the Wall Street Journal:

"India is now the world's fifth-largest energy consumer. It imports 75% of its energy (especially oil-and- petroleum products) today and expects to import 90% over the next decade... A boost in LNG exports would have many positive effects on both the U.S. and Indian economies. For the U.S. it would help create thousands of jobs and an expanded revenue stream for the federal government. For India, it would provide a steady, reliable supply of clean energy that will help reduce our crude oil imports from the Middle East and provide reliable energy to a greater share of our population. For both countries, which are committed to environmental sustainability, increasing the use and transport of LNG globally will help put into greater use one of the cleanest energy sources in the world."

The U.S. Is Not the Leader in LNG Production

The third important detail is that the United States does not have a corner on the LNG export market. With the U.S. slow to embrace LNG exports, Chevron (NYSE: CVX) has turned its LNG sights on Australia, with two projects prepared for export expansion.

The Gorgon LNG development, located off the northwest coast, is nearing 60 percent completion, and is on schedule to begin LNG exports by early 2015 – more than a year before the Sabine Pass terminal will begin exports.

If it expands, which is probable, another 5.2 million tons of capacity would be added every year, producing a grand total of 20.8 million tons of Australian LNG (or 1012.96bcf/day LNG). In comparison, the Freeport terminal will export 1.8 bcf/day of LNG, and Sabine Pass will export 500 million cubic feet of LNG per day, or 16 million tons LNG per year).

The second project, known as the Wheatstone LNG plant, is only about 10% complete, and will begin exports in 2016. Currently, the plant will have a capacity of 8.9 million tons once the $29 billion project is complete, but the company is looking to expand and secure a third-party partnership to become a 25 million-ton maximum capacity plant.

However, in spite of these massive LNG export possibilities, all is not without some concern for Chevron. Chevron had been headed into a partnership with Korea Gas (or KOGAS) for $30 billion of the Gorgon gas (1.5 million tons/yr). KOGAS is the world's biggest LNG buyer.

Industry sources believe KOGAS ended the talks with Chevron over the potential of more competitive prices of LNG when the U.S. begins to export.

Don't Be a fool

LNG exports have tremendous potential to change both the U.S. economy and your investing portfolio. But there is much more to know about LNG than what first meets the eye. Read beyond the headlines and look at the underlying conditions before jumping too quickly into any "get rich quick" possibility with LNG. Domestic political and global market conditions have significant impact on which companies will profit first, and which can do so in the long run. Take a deeper look at which companies (like Chevron) are expanding abroad in the LNG market, and don't limit yourself to just the companies winning approval in the U.S. (like ConocoPhillips). And don't forget to consider output and production levels. Early approval is not an indicator of long-term production or success.

With domestic natural gas production growing faster than consumption, the United States is expected to become a net exporter of natural gas by the end of the decade. Cheniere Energy will become the first LNG exporter approved to ship to high-margined countries that are not members of a free trade agreement. With natural gas prices expected to rest in the $4-$5 range per MMbtu, Cheniere is primed for solid gains once the initial LNG trains start chugging in the first half of 2015. Don’t wait until then – this 2013 darling continues to outperform the broad markets. Be sure to read all the details in this premium research report


Erin McBride has no position in any stocks mentioned. The Motley Fool recommends Chevron and Dominion Resources. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure