It has been a long time in coming, but initial large-scale overseas liquefied natural gas (LNG) shipments from the United States are set to begin in late 2015. Domestic natural gas producers hoping to capitalize on the shale drilling boom have been frustrated in recent years by the drop in prices that has come with the abundance of fresh reserves. The upcoming shipments of LNG offer the prospect of an improved pricing backdrop in the years ahead.
Drillers seeing the high prices being offered for LNG in Japan are understandably eager to get export capabilities up and running as quickly as possible to capitalize on potential profit opportunities. Prices for LNG in Japan and other parts of Asia in the mid- to high teens are roughly quadruple the quotations in the United States.
But it takes a long time to get a shipment facility approved and built. The first such plant, Cheniere Energy’s (LNG) Sabine Pass facility in Cameron Parish, Louisiana, will have taken five and a half years from planning to production, if it comes on stream in late 2015, as planned. Cheniere also has a smaller project on the drawing board, in Corpus Christi, Texas, set to send out LNG cargoes in 2019. Demand for output is brisk, even for the second facility. That’s a good thing, since the total estimated cost for the pair of facilities is over $30 billion.
Sempra Energy (SRE) also has the green light to build an LNG export plant in Louisiana. Construction is set to begin in 2015 on a facility that will cost a projected $10 billion and be ready by 2018.
There are a number of other facilities on the drawing board, as well. As of this writing, the amount of LNG proposed to be exported summed to around 50% of the natural gas currently pumped in the contiguous United States. Assuming a good number of those proposals actually materialize, chances are that domestic natural gas prices will rise, given the volume of shipments abroad. There is also political pressure to boost energy exports so as to counteract the threat by Russia to withhold energy supplies in order to dominate countries within its periphery. But opposition from consumer and industrial groups seeking to restrict exports will likely prove sufficiently weighty to keep a lid on overseas shipments. Only deep-pocketed companies will likely get the nod to build facilities, in any case.
It may seem like a no brainer to make money by exporting inexpensive domestic natural gas in liquefied form to Asia and Europe, where gas prices are much higher. But expensive facility construction suggests high fixed costs. There is also the strong possibility of global natural gas prices converging somewhere in the middle once U.S. export capacity gets in gear. Given high construction costs and the possibility of a more moderate international gas price scenario as time goes by, the risk is that margins in the LNG business will eventually narrow. Even so, we don’t think a worst-case scenario is in store for the LNG business. More likely is that the so-called first movers in the sector, such as Cheniere Energy, will enjoy the best profit opportunities. That is probably why its stock price has done so well in recent years.
We note that a big plus favoring U.S. projects versus those in Canada, Australia, and potentially east Africa is that a large amount of the infrastructure needed to move gas from fields to shipping points is already in place. Not coincidentally, that same infrastructure helped ignite the shale revolution in the first place. Overall, natural gas producers, from Dow-30 component Exxon Mobil (XOM -Free Exxon Mobil Stock Report) to independent drillers, such as Chesapeake Energy (CSK) stand to benefit from an improving pricing scenario in the three to five years ahead, and beyond.