Natural Gas Outlook

Keith Kohl

Written By Keith Kohl

Posted September 21, 2011

Are there any lingering doubts that the United States will become a powerhouse in natural gas?

We’ll let you in on a little secret…

We already are.

Of course, we came to this realization several years ago. And even with stagnant natural gas prices, our outlook hasn’t changed in the slightest.

In fact, we’re more bullish now than ever before…

This is a trend that investors won’t be able to ignore much longer. And those of us who have been paying attention all along are already reaping the benefits.

A Pure Growth Story

Look, we’ve seen firsthand the kind of growth U.S. natural gas production has had during the last few years.

Back in 2000, your average investor didn’t have the faintest idea what shale gas was — or the impact it would soon have on North American gas markets.

In 2005, U.S. natural gas production was in its sixth consecutive year of decline. The outlook was sketchy at best, and our marketed production that year fell below 19 billion cubic feet.

Since then, that amount has increased by 19%.

Now we’re producing natural gas at record levels — and there’s still a lot of room to grow.

Recently, that impact has been felt more in the Marcellus than just about everywhere else. Below, we can see how this growth story has played out for states developing the natural gas resources locked in the Marcellus formation

PA Gas Growth

Glancing over data from the Energy Information Administration (EIA), we’ll find that just two states — Pennsylvania and West Virginia — account for 85% of the entire Northeastern natural gas production.

Furthermore, production in Pennsylvania alone has increased to nearly 3 billion cubic feet per day, a three-fold increase.

And don’t forget that Marcellus development is only a couple of years old…

Natural gas investors are making gains right alongside the Marcellus’ production growth, despite tumultuous market conditions.

It’s a fact my colleague Ian Cooper and I have discussed at length. His most recent Marcellus play has delivered more than 40% for his Pure Asset Trader readers within the last few weeks.

And here’s the best part…

Peak Natural Gas

Ian and I both know the value of these Marcellus plays is only going to increase. The reason for this revolves around U.S. dominance in North American gas markets.

You see, the scales have been tipped toward Uncle Sam for several reasons — one being the major development of our domestic shale plays, like the Marcellus. But that’s the obvious reason. After all, when you start seeing Cramer doing his shows from areas like the Bakken, I think it’s safe to say the cat’s out of the bag…

What most investors aren’t looking at is the bigger picture. I’m referring to Canada’s peak natural gas troubles.

Unlike the United States, things in Canada have been rolling steadily downhill for the last ten years. When we struck gold with shale formations like the Barnett, Haynesville and Marcellus, Canada was left out in the cold, quite literally.

Since the 1960s, Canadians have come to rely on the fossil fuel. Natural gas makes up nearly a third of overall Canadian energy consumption; it heats more than half of the country’s homes. One might think a crisis would develop if production went sour…

The problem is that it already has.

Remember, 97% of all Canadian natural gas production comes from just three provinces: Alberta, British Columbia, and to a lesser extent, Saskatchewan.

Here’s what their troubles boil down to: Canadian production peaked in 2001. In total, Canada’s natural gas production declined by 25% during the last ten years. Alberta’s production — which accounted for 79% of the country’s total — fell by 37%. As you might expect, there’s no reversing Albert’s conventional production decline.

It makes sense, then, that U.S. natural gas exports to Canada have doubled since 2006. Just imagine how much that reliance on U.S. natural gas will grow in the decades to come.

Truth is, we have become a natural gas powerhouse. And now, we can get a step ahead of the game…

The Kitimat Connection

Controlling the North American natural gas scene is just the beginning.

I’ll tell you exactly what U.S. gas producers are drooling over now…

Tapping the Asian markets.

One way to do this is by building more LNG export facilities in the United States. There are two downsides we see here, the first of which is cost. These facilities cost billions. The second is that a very long time will pass before we see the first shipments delivered.

But it’s not all wishful thinking for the smart money; they’re already setting up future returns.

And it’s all because of the Kitimat connection.

Apache, EOG Resources, and Encana have teamed up to construct an LNG facility located in Kitimat, British Columbia. The project is expected to be fully operational within the next three years, initially exporting five million metric tons per year.

The destination of these future LNG shipments is easy enough to guess: The Kitimat facility will connect North American production with Asian-Pacific markets, where a war over LNG is already being fought between China and Japan. There’s certainly no shortage of demand there…

And we’re not talking about a decade-long time line for this project. The first shipments to sail are expected by 2015.

If the only thing holding your natural gas investments down are low prices, just remember that LNG prices are nearly triple that of U.S. natural gas prices.

Until next time,

kpk sig

Keith Kohl
Editor, Energy and Capital

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