North American natural gas supplies have gone from shortage to surplus within the short span of a few years as advanced technologies have opened up shale fields from Texas to the Northeast. To be sure, doubts remain in certain circles whether the amounts of gas being talked about are really in place. After all, shale drilling is comparatively new, and there is a chance that estimated reserves could fail to live up to expectations. But the odds appear to be much better that there is sufficient gas in place to provide the United States with decades of abundance.
For producers, cashing in on that wealth will require the development of an export market. That means building expensive facilities to turn gas into liquid capable of being shipped via tanker in the form of liquefied natural gas (LNG). The trouble is that no facilities will be ready to export gas until 2015. And even then, only Cheniere Energy’s (LNG) lone plant has received conditional approval for shipment abroad. Nearly two dozen lawmakers recently pressed the Obama Administration to speed up the approval process for allowing gas shipments. Such approvals will be necessary to keep up with the accelerated development plans for export terminals elsewhere.
There is a rich prize for LNG shippers who can get their bounty to market: Unit gas prices in the Pacific market (largely consisting of importers Japan, South Korea, and Taiwan) were recently in the mid-teens. Quotations for gas are also at double-digit levels in Europe. Of course, global prices may well meet somewhere in between the low domestic prices and the higher realizations being achieved internationally as export facilities are built. But higher domestic prices would benefit major producers, such as Exxon Mobil (XOM - Free Exxon Mobil Stock Report) and Chesapeake Energy (CHK). The strong possibility that natural gas will make up a greater percentage of the global energy mix should underpin quotations, too.
There are several good reasons to think that gas will be increasingly utilized around the globe. In the United States, gas is seen as a cleaner burning, cheaper alternative to coal. Meanwhile, in Europe, Germany plans to phase out its nuclear plants and Italy doesn’t plan to build any new reactors in the wake of the disaster in Japan. The desire to diversify supply is also strong, since several countries are averse to an over-reliance on imports from Russia, given concerns that Russia could withhold shipments for political reasons.
Prospects for LNG demand are even brighter in Asia. Japan is making natural gas imports more essential following its 2011 Fukushima Daiichi nuclear plant disaster, which has diminished support for nuclear power. Large-scale economic development in the Pacific Basin, most notably in China and India, is likely to result in materially higher gas consumption, as well. Overall, the International Energy Agency has forecast that global demand for natural gas will rise 17% over the next five years, as usage in China doubles.
All of these factors points to a bright future for the LNG market. Although the all-in cost of natural gas for importers would be higher than the cost of gas alone, after adding in the costs of liquefaction, shipping, and re-gasification, it would still be less than they are now paying. That suggests demand for U.S. LNG exports will, in all likelihood, be strong, potentially ushering in a promising new era for exporting companies.
At the time of this article, the author did not have positions in any of the companies mentioned.