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U.S. LNG Exports: Profits Worth the Wait

Why Low LNG Spot Prices Aren't a Death Knell for U.S. Exporters

Written by Keith Kohl
Posted November 17, 2015

Mark your calendars, ladies and gentlemen: January 12, 2016 is the day the first LNG tanker will be filled from the Sabine Pass in Louisiana.

This, however, is just a test run. Commercial tankers won't start sailing until later in the year.

But this is the official start, the U.S.'s first foray into the global LNG market.

So why should you should care?

Because despite the bullish outlook on the market, there's still a tremendous window of opportunity here for individual investors to quietly get in early — before these exports go into full swing!

Demanding Results

Let's go ahead and dispel some of the common misperceptions... starting with Japan.

The country has recently restarted several nuclear reactors since the four-year-old boycott of nuclear energy after the Fukushima disaster.

Now we're expecting another 15 to 20 nuclear reactors to restart within the next five years, which could push the country's demand for LNG lower, to under 80 million tonnes per year.

As I'm sure you've guessed, that's putting a damper on sentiment over the LNG trade.

After all, Japan accounted for 36% of global LNG trade last year, importing an excess of 120 billion cubic meters of gas.

So the world's biggest LNG importer is about to cut its imports. Should this worry U.S. LNG companies?

Not necessarily...

You see, Japan would not have been the U.S.'s biggest client, simply because the U.S. isn't Japan's first choice for LNG supply — that spot goes to Australia.

Not only are the Aussies already an established LNG exporter, but they can also offer lower prices to Japan due to their close proximity to the country.

And even though Japan will still want to diversify its import portfolio, I can't see Australia losing its market share anytime soon.

However, there are some cases where geographic location isn't the biggest factor...

Politics Hurts the Pipes

Before we delve any further, first take a look at this map from the BP Statistical Review of World Energy 2015:

11-17-image1

Notice anything unusual?

It turns out the single largest line of trade of natural gas is from Europe to Russia via pipeline — amounting to a staggering 120.8 billion cubic meters of natural gas for the year!

You can probably guess where this is going by now: Russia's political disputes with Ukraine are hurting its natural gas monopoly in Europe.

Now, I've mentioned before how these political disputes lead to questions of debt and ownership of the very pipelines Russia uses to transport its natural gas through Ukraine.

And more recently, the EU has denied Russia new pipeline routes to get around this problem.

But why?

Russia's bargaining power with this commodity has been slipping. According to Eurostat, the European Union's Luxembourg-based statistical office, the group reduced natural gas imports from Russia by 2.3% between 2013 and 2014.

That's a small number... for now.

What's more is that there are already signs the EU is diversifying its natural gas imports.

It turns out that the first LNG export contract in the U.S. was signed with France... and that's just the beginning.

Reduce, Replace, and Recycle

The bottom line here is that the EU is unquestionably trying to reduce its reliance on Russian natural gas.

Meanwhile, the U.S. is ramping up exports, which will be ready to replace the EU's gas demand with a more affordable, less volatile supply over the next few years.

More importantly, the market cycle is about to turn, and glut or no glut, gas prices won't stay this low forever — too many economies depend on it.

Of course, the ace up the sleeve for U.S. LNG exporters is a readily available supply of cheap natural gas in prominent shale and tight gas plays like the Marcellus.

Until next time,

Keith Kohl Signature

Keith Kohl

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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.

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