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Betting on the Coming Boom in Natural Gas Prices

As I write this from Pittsburgh, the temperature has reached the single digits. This is not a big deal for some of you elsewhere – like the Plains States or New England – but it does serve as a reminder of what season this actually is.

There is also something else happening this morning.

Natural gas prices are moving up.

There is still some way to go before these prices reach the $4 plus level (still the perceived breakeven point for a number of producers). Still, after testing the low $3 range earlier in the month, the temperatures in the East are certainly bringing gas back into perspective.

Natural gas usage remains sensitive to temperatures and weather conditions during the winter. Last year's unusually warm temperatures depressed gas prices more than usual.

That was because the amount of gas extractions was much above anticipated levels. The combination of lower demand and higher supply translated into a downward price pressures.

But we are in a different environment for gas production than we were a few years ago.

Until 2005, the assumption was that the U.S. would need to import more liquefied natural gas (LNG) to compensate for accelerating declines in conventional domestic production.

LNG overcomes the primary problem faced by natural gas users. Available supply is traditionally limited to where pipelines are running. LNG, on the other hand, cools gas to a liquid, allowing it to be transported by tankers almost anywhere by water, regasified at an import terminal, and then injected into the local pipeline network.

By the middle of last decade, estimates of how much domestic gas need would have to be imported via LNG were as much as 15% and as soon as 2020.

But the ability to exploit unconventional deposits (shale and tight gas, coal bed methane) has dramatically changed the equation.

The Rise of U.S. Export Terminals

Companies are retrofitting current import terminals to export LNG from the U.S., using shale gas excess volume as the feeder stock. Of course, that also provides an additional source of revenue for producers and processors… and added potential for investors.

From a current level of zero, global estimates are putting the American component in LNG trade at 9-12% as early as 2020.

This will be starting in earnest next year (2014) and there are huge markets waiting in both Asia and Europe. Europe is a straight shot from East Coast (Cove Point, MD) and Gulf States (Sabine Pass) locations.

However, the Asian market remains the main LNG consumer. There, the 2014 completion of a project to deepen and widen the Panama Canal will allow LNG tankers to use the shortcut and open Asia to U.S. LNG sales.

But LNG is not the only or even the major demand spike underway for gas.

It's what's happening elsewhere that will be the real boon for investors.

Power Plant Retirements Swell

The U.S. will be retiring at least 90 GW of electricity generation by 2020, with an additional 20-30 GW likely because of new non-carbon emission limits. The vast majority of this is coal-fired and is being replaced by gas as the fuel of choice.

For each 10 GW replaced, 1.2 billion cubic feet of gas will be required daily.

If only half of the expected capacity replacement occurs, the additional requirements would eliminate three times the current gas surplus in the market.

The LNG and power needs will buttress the demand side regardless of what Mother Nature chooses to do this winter.

There are also increasing usages in other areas:

  • As replacement for crude oil as raw material for petrochemical production, fertilizer and all manner of plastics and components;
  • In broad industrial uses from normal energy requirements to the development of new chemical and related lines (this industrial use likely to be the lack to kick in after a recession); and,
  • In the expansion of LNG and compressed natural gas (CNG) as a vehicle fuel (already underway in heavy trucks).

All of this has prompted upward revisions in what had been still weak gas pricing estimates. Most analysts are putting the target at about a dollar above current prices (currently this morning about $3.53 per 1,000 cubic feet, or million BTUs, the NYMEX futures contract unit).

My estimate puts natural gas prices at around $4.65.

However, just about everybody is looking at new utilizations for gas increasing the price to about $6 by as early as 2015 or 2016.

Now we are not going back to the $13 levels experienced some five years ago for one simple reason. Today, we have far more extractable reserves than we did back then. Operating companies can rev up production quickly.

How to Profit From Higher Natural Gas Prices

So, how should you play this?

The improvement is coming, but there will be some hiccups along the way. The sustainable rise in price is also not something that will be happening in an accelerated fashion anytime soon.

There are two approaches the average investor can use to "test the water."

First, focus on the producers and service providers who are able to work in both oil and gas, both on the conventional and unconventional sides of both. The oil prospects are improving more quickly and this allows increasing commitment to gas without becoming dependent on what is still a sluggish improvement.

Second, begin positioning in those sectors likely to benefit most from the rises in demand noted above. LNG may not be flowing in a major way for more than a year. But the huge multi-billion dollar, 20-year plus contracts for import are already being signed.

Here, members of my Energy Advantage have already established holdings in the market leaders: Cheniere Energy, with an easy to remember stock symbol (NYSE: LNG); and its connected partnership Cheniere Energy Partners, LP (NYSE: CQP).

Cheniere Energy owns a massive export terminal at Sabine Pass on the border of Texas and Louisiana. This facility received the first blanket permission from the U.S. Department of Energy for the export of LNG to any country in the world not on a sanctions list (sorry Iran and North Korea). The company already has six huge commitments from some of the largest LNG importers globally.

CQP is the partnership actually controlling the terminal. With Washington finally signing off on the export of LNG, this is going to be moving up.

Exploiting these prospects will require some time and a more detailed strategy as the natural gas prices improve.

But at least the above two suggestions will allow you to start the process without mortgaging the farm.

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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  1. Ron Wagner | January 24, 2013

    Very good article. Remember that this is a worldwide phenomenon. All the world is attempting to replicate our success, plus offshore is making big progress.

    Natural gas is the future of energy. It is replacing dirty old coal plants, and dangerous expensive nuclear plants. It will fuel cars, trucks, vans, buses, locomotives, aircraft, ships, tractors, air conditioners, engines of all kinds. It costs far less. It will help keep us out of more useless wars, where we shed our blood and money. It is used to make many products. It lowers CO2 emissions. Over 4,400 natural gas story links on my free blog. An annotated and illustrated bibliography of live links, updated daily. The worldwide picture of natural gas. Read in 67 nations. ronwagnersrants . blogspot . com

  2. | March 17, 2013

    Time and the Govt. process control this energy sector , many factors that all have to work with the end result of demand. Warren Buffet's Oil Train with all his Obama pull keeping the Keystone and others at a slow deliberate pace will put an extra 22 Billion $ above and beyond his pre estimate profits. That is a pretty good number to be on the right side of and I am not even talking about who makes those tanker rail cars, which brings us to the hostage, the American consumer has yet to feel the glory of a train derailment but yet people cross RR Tracks everyday, what a good reminder of progress. Not to mention the Canadian rail system. But as we progress backwards at least we know we will be reminded of the Profits big oil makes but not that there tax bill is more than there profit. Warren makes a killing and big oil gets the blame how we seem to shine in Obama's ignorance. But he keeps China happy and Warren while the US tax payer and our good Canadian neighbor play second fiddle to China. I will make a suggestion THE little train that could without rail road tracks shine before many if there permit could somehow slip through the political drama. VERESEN (FCGYF) A 2 $Bilion Dollar money making machine. They don't get the attention on volume of traded shares and they are somewhat strategically located with a diverse or should I say don't put all your eggs in one basket, meaning of coarse that they have a few avenue's that there business profits. How unique wind, water, pipeline, upstream, downstream, well lets just say mother nature gets respect from them. Not to mention a healthy yield + a monthly .08 dividend that does not miss a beat and all for that 11 to 15 Dollar per stock price. But one thing that really stands out that could change there outlook and maybe sooner than the other, like the export LNG Sabine Pass project the look a likes TX/La and the possible Virginia port they will come on line but there are other worldly countries that could throw a wrench in that Asia China gas user. They are not a gem in the rough they make money pay there bills and have a good overall happy work labor force, actually can't find a reason to not just being happy at a stock with a monthly dividend of .08 cents for just a little over $10 Bucks a share that is traded so thinly they hardly ever get attention. But they are do for a boost and all it takes is a permit and a few yes sirs and the pipeline out of Canada into the coast of Oregon a port ready for export to Asia/China with Nat/LQD/Gas would be a game breaker.The only port on the North American West Coast side besides Alaska which have more value than the Gulf of Mexico or the Atlantic coast ports to take advantage of there product would put a kink in the other players exports would draw great attention to the Yang money, frankly surprised that they have been able to be so patriotic to keep China from knocking on there door already. The writing has been on the wall with the Keystone and Obama and Warrens DC keep the train rolling for insiders and even if Veresen has to wait to get this ball rolling when Sabine Pass does it would still be a logistical home run. Right now 1000 shares gets you about 1000$ a year in divy's at a sweet investment when you look at there other assets the alliance pipeline I like the Fort Chicago ring it has to it along with the Bakken and eggs for breakfast as a good way to start the day not to Mention they are not shy with there R@D looking down the energy road for diversification but if they pull off the west coast export they will not be a 2 Billion Dollar Company anymore, actually they might not be so patriotic either remember China makes a lot of $ of the interest from what Obama borrowed and he still owes them some favors. He will deny that China is not buying Canadian resources with American tax dollars and he is right China is buying those our great neighbors resources with the interest from the US paying back the loans to China, how much interest does several Trillion in loans generate anyway? You might say in a round about way the US tax payer gives China a year round Christmas present from a money printing hyper inflation US President. But as unusual this recommendation comes with out a stop loss, the .08 a month at a Stock in the low teens is a good play already ask Chicago.

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