U.S. Natural Gas Exports
LNG Race Takes Shape
The countdown to 2015 has begun...
The date is locked in, with billions of dollars on the line.
Certainly, it will mark a critical moment for the U.S. natural gas industry.
In just a little over two years, the United States will finally start shipping liquefied natural gas abroad, signifying a 180-degree turn since 2008.
Cheniere Energy is scheduled to begin sending shipments from the first of four processing facilities at their Sabine Pass terminal. The Sabine Pass project sits roughly 3.5 miles off the Gulf Coast; it will initially come online with a processing capability of a little more than eight million metric tons of LNG from two of the four planned trains.
Despite being the only project in the U.S. that's approved to export LNG, we weren't wholly convinced this new outlet for natural gas producers would really take off...
The first sign of trouble came in a budget hearing last year when former Energy Secretary Steven Chu was grilled by Congressional members about why we would even want to export our cheap natural resources.
One look at what other countries are paying for the same resource, and it's easy to question any benefits to losing our edge:
Source: America's Energy Advantage
Exporting natural gas to Europe and Asia — where prices are more than double and triple what we're paying in North America — will directly cause prices to rise here in the States...
Which in turn would increase costs for the manufacturing sector.
Enter: the lobbyists.
Their argument has some weight if you buy into the advantage natural gas is giving both the sector and the U.S. economy, creating over half a million manufacturing jobs within the last three years and projecting more than five million additional jobs over the next seven.
And if you don't think the government can delay these types of energy projects, look no further than the mess surrounding the Keystone XL Pipeline.
But to be honest, I've slowly been warming up to the idea. If there's one sure-fire way to make me jump the fence, it's with numbers...
The Department of Energy's December report evaluates the impact of potential LNG exports on the U.S. economy. (Click here to view the full report.)
In every one of the reference cases, they saw a net benefit to the U.S. — with natural gas production increasing by as much as two trillion cubic feet.
The real kicker is the report's conclusions regarding the manufacturing sector: “Manufacturing sector output decreases by less than 0.4% while EIS and electric sector impacts could be about 1% in 2020 when the natural gas price is the highest.”
Unfortunately, boosting production might not prove as easy as you'd think...
If you break down U.S. gas production using the EIA's own data, you'll find that production is either flat or declining in every area except shale gas wells (click chart to enlarge):
To put it bluntly, the success of U.S. LNG exports will depend on the successful development of our shale gas resources. And so far, the numbers say it's working. The U.S. is producing about 30 trillion cubic feet of natural gas right now as conventional production circles the drain.
Race for the Prize
Canada and the United States find themselves in a heated battle over who can reach LNG customers in Europe and Asia first. Both these places are promising, since neither will meet their respective demands for natural gas in the decades to come...
But trust me when I say the last thing China wants is a dependence on cheap North American gas.
That's why the Chinese are spending billions here in the U.S. for shale exposure. The end goal for them isn't to simply get rich off of U.S. energy resources (although that would help their supply-demand issue), but rather to possibly apply that technology in their own massive shale gas deposits.
You see, China is home to the world's largest shale gas resources, one that dwarfs our own. But their struggle lies in their methods of extraction.
They haven't figured out a way to extract these fossil fuels economically.
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China is years away from tapping their shale gas deposits — and they'll have a gigantic target painted on their backs until they do.
The bottom line: Potential U.S. and Canadian LNG exports will become one of the most explosive win-win scenarios for early buyers we've ever seen.
Will it happen? Absolutely. Again, Cheniere Energy already has their first shipment scheduled for late 2015!
And the excitement over Cheniere has rewarded investors handsomely over the last few years:
We can expect to see more export projects getting the stamp of approval (especially if the Sabine Pass continues to pin down additional long-term contracts). Right now, there's more than a dozen LNG export projects waiting for the green light — and that's only in the lower 48 states.
Tack on a vigorous campaign to progress Canada's LNG projects in British Columbia, and the race is on...
So far, three export projects have approval by the Canadian government. Now they're trying to attract more interest by setting the tax bar as low as possible in the LNG industry.
In all of this, there has been only one commonality that every potential LNG export project shares: access to cheap, abundant natural gas.
And the only way to guarantee this access is through a piece of drilling technology that enables companies to open up a vast amount of our natural gas resources...
Until next time,
A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.