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Invest in a Natural Gas Future

The transition from coal to gas is going to be big

Written by Brian Hicks
Posted April 27, 2015

A couple of weeks ago, North Dakotans living in the midst of the Bakken felt the devastating effects of one of the state's worst energy problems...

I'm not talking about job cuts or falling rig counts, although I'm sure many in North Dakota feel the burn of those, too.

Instead, the state has seen a series of wildfires scorch farms, prairies, woods, and local resorts.

On the surface, wildfires may not seem like an energy industry problem, but in the case of the recent fires in North Dakota, this notion couldn't be more wrong.

On Tuesday, April 14th, for instance, a 3,000-acre prairie fire ignited after oil leaked into a flaring apparatus at a nearby Whiting Petroleum (NYSE: WLL) oil well.

Like all oil that hits a spark, these small droplets exploded and set off the fire that burned a Tobacco Gardens Resort property on the shore of Lake Sakakawea in McKenzie County.

PrarieFire

There had been a statewide ban on burning in North Dakota, but the only restricted parties were residents. Industrial and commercial burnings — like those in the oil patch — weren't limited.

But after a series of flaring-related wildfires in the state, it's only a matter of time before residents and the owners of other businesses call on the government for tougher regulations on flaring.

Even though many of you may find regulation anathema to economic growth, I assure you that when it comes to flaring regulations, this is anything but true.

Here's why...

Industry Cravings

The energy and utility industry craves new fuel sources like natural gas, as coal becomes a pariah in the minds of the press, scientists, and other environmental activists.

As utilities throughout the world transition from coal power to natural gas, nuclear, and renewable energy, the easiest transition is from coal to natural gas — a cleaner, cheap, and abundant fuel.

According to the EIA, as I discussed last week, the United States is set to be a net exporter of fossil fuels sometime between 2019 and 2030 if commodity prices remain reasonable.

exportproj

This is important because it shows that it's not only the U.S. hunting for cheap natural gas, but the rest of the world looking for clean energy.

But how does this relate to flaring?

Well, when a driller produces oil, there is excess natural gas mixed in, and if companies don't have the space or infrastructure to store it, that natural gas can build up and explode.

To avoid this, producers store and sell what they can of their excess gas and burn the rest off into the atmosphere.

So when a flare stack causes a fire, like the ones in North Dakota recently, it's because the company had no other choice...

Burn the gas away, wait for it all to explode, or stop drilling altogether.

Even still, residents tired of feeling beholden to the oil industry without any regulation are going to push for stricter limits on gas flaring.

As the regulations come, expect them to boost investments in both natural gas and its services and midstream processes.

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The Infrastructure Play

An integral part of the flaring problems in North Dakota, Texas, and the rest of the world is a lack of infrastructure.

Think about it: If you want a driller to harvest excess gas instead of flaring it, the company needs unfettered access to compressor stations and pipeline systems, or at the very least storage tanks.

Unfortunately, all of the heavy equipment and facilities take a long time to build and license to the proper drillers, so flaring has surged with oil production while infrastructure lagged behind.

According to the World Bank, global flaring releases as much as 4.9 trillion cubic feet of gas each year.

At the current U.S. price of $2.56 per mmBtu, the amount of gas flared worldwide effectively wastes $12.5 billion a year globally, not to mention the excess carbon emissions caused by flaring and the potential costs of mitigating those emissions.

And remember, this is at U.S. prices for natural gas. If you look at Europe, China, or Japan as an example, prices can be three to four times higher there than they are in North America.

But that's where infrastructure comes in...

Last week, the CEO of Kinder Morgan (NYSE: KMI) said the North American network of natural gas pipelines is in the middle of a historic reconfiguration.

Now that North America has a host of new oil and gas formations, it only makes sense that pipeline networks are changing. Pennsylvania has the biggest gas formation in the United States, despite Texas and Louisiana's historic roles as gas producers.

Still, according to Kinder, the Gulf is going to be home to a bevy of industrial projects whose activities require natural gas as a feedstock. And when you couple industrial uses with exports and the power sector, we are going to need a lot of natural gas.

So it won't just be the Marcellus or Utica or Haynesville producing it anymore; rather, the entirety of U.S. oil and gas fields will have to contribute if we are to meet the demands of the next decade.

That's where flaring regulations come in. When oil producers in the Bakken, Niobrara, Permian, and Eagle Ford are forced to rein in flaring and harvest all of the gas they produce, infrastructure companies will reap the benefits.

Pipelines and compressors stand to see high demand from oil producers, which creates a window for high profitability in the natural gas infrastructure space.

Good Investing, 

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Alex Martinelli

With an eye squarely focused on the long-term, Alex Martinelli takes the art of income investing to a higher level within the energy sector. His research has helped hundreds of thousands of individual investors identify well established companies that have a long history of paying out dividends to their shareholders. For more info on Alex, check out his editor's page.

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