Freeport Terminal Advances U.S. Natural Gas Futures

Written By Jason Stutman

Posted May 31, 2013

North America is the undisputed, continental champion of the global shale revolution. There’s really no denying that.

Canada and the United States are reaping the benefits of increased shale production more than any other players in the global market.

And the two neighbors are procuring mutual benefits as a result of exports coming from both sides.

Canadian Oil

Despite a decrease in domestic demand, Canada’s GDP has grown at an annual rate of 2.5 percent during the first quarter of 2013. This is the fastest growth-rate the country has experienced since 2011.

Much of this growth can be attributed to increased oil exports to the U.S. – a result of high production rates and recently increased pipeline capacity.

The Energy Information Administration (EIA) reports that Canadian crude constituted 38.7 percent of U.S. imports in February. This is the highest we have seen in over twenty years!

And with output projected to remain at the same rate through the current quarter, economists expect Canada’s GDP growth to remain at a similar mark of 2.3 percent.

Sharing the Wealth

Of course, Canada isn’t the only player benefiting from shipping shale across national lines. Increased export capacity in the United States will drive profits for several companies in the shale gas industry.

The EIA reports that Canadian refineries are importing an increasing amount of crude oil from the United States. Monthly exports from the U.S. to Canadian refineries have increased as much as 400 percent compared to historical averages (it is notable that much of this growth is coming from the Gulf and East Coast).

U.S. Crude Exports to Canada

On top of that, the U.S. is starting to approve expanded gas exports. The Department of Energy (DOE) gave a thumbs up to the Freeport LNG export terminal two weeks ago, which will increase U.S. export capacity by almost 1.5 billion cubic feet per day.

Originally built for receiving imports, the Freeport LNG terminal has seen a complete reversal in assignment as a result of once-unexpected LNG production rates.

And though there has been opposition against exportation, the overflow of natural gas supply in the U.S. creates market opportunities too lucrative to resist. Natural gas in the U.S. is trading at a far lower price than that of global competitors, which gives a major advantage to the U.S. shale industry.

A Two-Sided Coin

Unfortunately, if you live in the U.S., this could actually end up hurting your wallet. An increase in export capacity is naturally expected to result in higher domestic prices.

But when it comes down to it, a rise in natural gas prices is well worth the upside (as long as you are looking in the right places).

The DOE announcement to approve the Freeport LNG terminal will not only benefit LNG companies like Chevron (NYSE: CVX) and ConocoPhilips (NYSE: COP) through increased domestic prices, but it will also potentially usher in a season of U.S. energy exportation.

Simply put, the announcement has removed much of the recent ambiguity surrounding the DOE’s position on LNG exports.

And with the amount of investment pouring into the shale industry, there is no indication of a drop in U.S. production. At this point, production is not the issue.

The issue is restraint due to a lack of demand and transportation. With new options now opening in the global market, several players in the shale industry stand to acquire ample rewards.

The Freeport LNG terminal isn’t expected to begin exportation until 2017 and is still waiting on approval from the Federal Energy Regulatory Commission.

But in spite of the lack of certainty, natural gas futures for June 2015 delivery jumped 3.8% following the DOE announcement – analysts are expecting a price jump, and I am more than inclined to agree.


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