Change of Fortune for Cheniere Energy
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Here is an idea that was unthinkable just a few short years ago.....
The United States will become the world's top oil and gas producing country by 2020, surpassing both Saudi Arabia and Russia. Quite a feat for a country where overall hydrocarbon production was thought to have peaked in the early 1970s.
This remarkable idea was put forward in a recent report from the energy consultancy PFC Energy.
The reason behind the forecast, on a barrel of oil equivalent basis, is the rapid production growth of hydrocarbons (especially natural gas) from shale rock thanks to advances in technology.
The growth in natural gas extraction from shale has made the U.S. the world's biggest producer of natural gas. This in turn has led to the point where the country is poised to enter the global liquefied natural gas market by retrofitting import terminals.
According to Nikos Tsafos from PFC Energy, “North America is the second-largest source of additional LNG [export] capacity in this decade after Australia.” Quite a turnaround from a few years ago when the U.S. was trying to build terminals to import LNG.
The United States took a step closer in October to become a LNG export when Britain's BG Group ADR (NASDAQOTH:BRGYY.PK) signed the first long-term agreement to purchase LNG from the Sabine Pass facility in Louisiana.
BG Group signed the landmark $8 billion LNG export deal with Cheniere Energy (NYSEMKT: LNG). It will sell liquefied natural gas to BG for 115 percent of the U.S. benchmark Henry Hub price, plus a $2.25 premium. Cheniere will sell to BG 3.5 million tons per year of LNG for 20 years with a potential 10 year extension.
This deal is important to this nascent industry because BG Group is major player in the global LNG market, which looked at the economics of U.S. exports and found it to be feasible. BG Group exports LNG to 19 different countries around the globe.
The deal is also highly significant to Cheniere Energy since it's expected to bring in $410 million annually into the company's coffers and is a major reversal of fortune for Cheniere, which had bet the farm on LNG imports.
Look for Cheniere to announce more export deals in the future too. Their Sabine Pass terminal has the capacity to handle 9 million tons per year of liquefied natural gas.
There will be plenty of customers for Cheniere's LNG exports. BG Group forecasts demand for U.S. LNG will be robust, given the fact that the world must replace by 2020, on a global gas basis, 75% of current supplies. That would require 9 percent growth a year which is three times the current growth rate of 3%.
The markets that this LNG will most likely go to are located in Asia where demand is high. While U.S. natural gas prices have fallen, prices in Asia have rocketed 50% since March. Asian spot LNG prices are now around $17 per million BTU, compared to less than $4 in the United States.
This is all good news for Cheniere Energy and its long-suffering shareholders.
The author holds no positions in any of the companies mentioned.