An incredible shift in the global energy markets is going on right now… and it’s about to make the United States the world’s most important producer of oil and natural gas.
Most people don’t realize it, of course. Americans are used to thinking of our country as dependent on shaky, hostile nations for our energy needs.
That’s changing… fast.[ad#Google Adsense 336×280-IA]Advanced technologies, notably hydraulic fracturing and horizontal drilling, have opened vast domestic resources.
But it’s safe to say that despite the huge new supplies… I’m bullish on natural gas.
In April, just as natural gas was hitting its most recent lows, I told my Investment Advisory readers …
Sooner or later, the price of natural gas will rebound sharply… and not just because it always has in the past. What will propel natural gas prices over the medium term (say, five years) is an economic truism: It’s impossible for a surplus of energy to exist for long. As prices fall, more and more uses for natural gas will appear. At some price, natural gas becomes competitive with other forms of energy…
The big problem with the natural gas markets isn’t that there’s too much gas. You really can’t have too much energy. People will always consume it, if it’s cheap enough. The real problem with the natural gas markets is there’s no global distribution.
To understand my argument, you need to understand why and how natural gas will become a global fuel, with a consistent global price – just like oil.
The prices for liquefied natural gas (LNG) are determined by long-term supply contracts. Little gas is available on the spot market (the market for immediately available gas). And currently, the prices on these long-term contracts are highly variable. In the U.S., natural gas sells for around $3 per thousand cubic feet (mcf). In Europe, it goes for around $11 per mcf. And in Asia, it sells for approximately $17.
These price discrepancies present a huge opportunity for investors …
In the U.S., gas production has jumped 20% in the past five years. The International Energy Agency (IEA) reports that last year, the U.S. was the world’s second-largest producer behind Russia. The difference in production volumes between the two was a minuscule 3.8%.
Last year, Russia produced 677 billion cubic meters (bcm) of natural gas, 20% of the world’s total supply. The U.S. produced 651 bcm, 19.2% of world production. Russia exported about 29% of its production, which made it the No. 1 exporter.
You might expect that, as the world’s No. 2 producer, only a fraction behind top dog Russia, the U.S. would also be among the world’s largest exporters.
But we’re not. The tiny Arab nation of Qatar – with 2 million people, its population is roughly the size of Houston – claims the title of No. 2 global exporter, behind Russia.
It produces about 151 bcm a year. That’s about 4.5% of the world’s annual total… but it ships out nearly all of it – 119 bcm. And resource-rich Australia is ramping up natural gas production for export. Experts say Australia will surpass Qatar in exports by 2017.
Even though the U.S. is producing a huge surplus of natural gas, we export essentially none of it. U.S. producers want to export their product to higher-paying markets… But right now, the U.S. has no operating export facility.
Cheniere Energy, a company I recommended last July in my Investment Advisory, will be the first. It’s constructing a huge LNG export terminal in Louisiana. It expects to start operating in 2015.
The company has already signed a 20-year supply agreement with the Spanish natural gas infrastructure and utility company Gas Natural. The Spanish company agreed to buy 3.5 million metric tons of LNG annually… beginning in 2017. Chenier also struck a 20-year deal with the United Kingdom’s oil and gas company BG Group. And other customers that are lined up include the Indian gas transmission and marketing company GAIL India Ltd and the Korea Gas Corp.
But Cheniere is not the only opportunity out there. This abundance of natural gas is one of the biggest economic trends of my lifetime. And the world needs a lot more LNG infrastructure. Things like LNG export terminals, LNG tankers, and storage-and-distribution facilities.
According to an estimate by trade group Interstate Natural Gas Association, North American industries need to invest $6 billion-$10 billion per year to maintain the storage network capable of handling the growth in production.
I’ve pointed out this opportunity to you before. In April, I wrote:
Fortunes will be made as entrepreneurs and investors build the ships and pipelines necessary to take advantage of the higher price of LNG across the world’s markets.
It’s not going to happen overnight… but years down the road, there will eventually be a large, global distribution system for natural gas. Prices around the world will converge. And those holding the best distributions assets will make a fortune.
While the surplus of natural gas in the U.S. has most people bearish on the sector, I’m bullish. I know it’s impossible for a surplus of energy to exist for long. I know billions will be spent making natural gas a global fuel… with a global price. And I know it will be a boon to companies that transport or are preparing to transport LNG.