We’ve heard all sorts of promises being made over U.S. LNG exports.
For some, the reward is almost too good to be true: a natural gas market paying up to four times the price of contracts traded at the Henry Hub?
What fuels this type of bullish speculation?
After watching the U.S. gas supply surge higher over the past five years, it’s not so far-fetched for producers to seek ways to tap the lucrative LNG prices paid on a daily basis in Asia. But it’s more than just the high price countries across the Pacific are willing to pay for a natural gas…
You see, these countries are preparing for a massive influx of LNG shipments. They know it’s coming. Look no further than the global fleet of LNG tankers…
Currently, there are more than 580 LNG tankers in the world with a capacity over 10,000 cubic meters that are active or currently under construction.
Now, obviously, that figure doesn’t tell the whole story. If it did, it would grossly undermine the stake that Asian countries have in global LNG trade.
The Asian Battleground
The vast majority of LNG tank ships were built in China, Japan, and Korea. These three countries account for roughly 90% of the tankers currently in operation or being constructed.
In fact, every single one of the tankers being constructed right now that’s scheduled to be delivered by 2014 or beyond is being built in one of the three Asian nations.
In other words, all 63 LNG tankers on the list slated to be delivered after this year have firm roots in the Asian LNG market.
But this shouldn’t come as a surprise to anyone.
After all, demand for these LNG shipments is huge right now. Three years ago, these LNG carriers commanded a day rate of about $40,000. This year, that amount has swelled into the six-figure range.
The problem lies in getting the LNG there — and that’s a whole other issue for U.S. exporters.
The biggest obstacle for U.S. LNG exports is geography.
Typically, you would expect that shipments leaving the Gulf of Mexico are destined for the Europe, not Asia.
However, a $5.2 billion project underway to widen the Panama Canal would allow LNG tanker traffic to pass through and head toward Asian markets. (And to that end, I have a feeling the United States will soon be regretting its decision to relinquish control of the 48-mile canal in 1999.)
Before investors get excited over tapping into Asia’s future gas demand, however, remember that this direct access to the Pacific comes with one major hitch: exorbitant fees.
Although the speculation varies from source to source, Panamanians could tack on a hefty toll for letting tankers pass. Some estimates reach as high as $1 million.
There is also the question of whether the project can be finished in time for the first LNG exports to sail out of the Sabine Pass terminal in 2015. That’s assuming more delays don’t push the completion date back even further.
The Other Shoe Drops
If you happen to fall in the camp that believes these U.S. LNG exports will one day satisfy Asian demand, I’ve got some bad news for you…
Not only will companies have to fight for the long-term contracts found in the LNG trade, but they will also be waging an internal war to export U.S supply.
Last year, the United States produced 69.3 billion cubic feet of marketed natural gas production every day, slightly less than what it consumed that year. And that figure essentially excludes gas that’s used for re-pressuring, vented and flared, or the non-hydrocarbon gases removed in treating or processing operations.
Now, that’s not to say you can’t remain bullish on U.S. natural gas. In fact, I had a long conversation over lunch yesterday with a colleague of mine who pointed out several of those reasons.
You should be focused on nailing down the right opportunities open to individual investors. In this case, profiting will be a matter of backing the right horse in the LNG export race.
Until next time,
A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.
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