With its domestic natural gas reserves nearly depleted, the U.K. is turning to a U.S. company to supply enough liquefied natural gas (LNG) to provide energy to nearly 2 million British homes for 20 years.
The deal has big implications for companies involved in the flourishing U.S. shale gas industry, in which gas is extracted through hydraulic fracturing, or fracking.
You see, fracking has led to an abundance of natural gas and will go a long way toward making the U.S. a net exporter of energy instead of a net importer in the coming years.
That, of course, will be a big boon to natural gas companies that export LNG.
Why the U.K Needs U.S. Shale Gas
Under the U.K. deal, Centrica - which serves 11 million households - will import 1.75 million metric tons of LNG annually from Cheniere's Sabine Pass facility in Louisiana. That's enough to supply power to 1.8 million - or 8% - of U.K. homes. The first deliveries are expected to begin in 2018 and the 20-year deal can be extended for an additional 10 years.
Along with the base $15.1 billion cost, Centrica will pay Cheniere a 15% premium on U.S. natural gas prices for each shipment, plus a set fee of $3 per million British thermal units of gas.
Even though gas deliveries won't start for five years, the deal couldn't come soon enough for the U.K. The country's gas reserves have been depleted as unseasonably cold weather increased natural gas demand. The U.K. just got a bitter taste of gas shortages during the coldest March in 50 years.
But the energy woes are long-term. Some predict blackouts within three years in Britain and analysts warn the gas shortfall could add more than $300 to the average family bill next winter.
British energy officials praised the deal, saying it would help fill a void in the U.K. energy supply.
U.K. Prime Minister David Cameron released a statement Monday, saying, "I warmly welcome this commercial agreement between Centrica and Cheniere. Future gas supplies from the U.S. will help diversify our energy mix and provide British consumers with a new long-term, secure and affordable source of fuel."
Traditionally, the U.K. has relied on gas from the North Sea gas fields, but production there has peaked and supplies from the area have been decreasing for years.
The U.K.'s other major sources of the fuel have been Norway and the unstable Gulf state of Qatar. Those two countries provide more than 80% of the U.K.'s gas imports.
But Qatar has refused to commit to a long-term deal with the U.K., instead opting for a three-year contract signed in 2011. The country has also been redirecting to Japan and South Korea the natural gas intended for the U.K., due to higher natural gas prices in Asia. U.K.'s natural gas imports from Qatar fell 68% in January from the year before.
To survive in the short-term, the U.K will import natural gas through pipelines from Russia and Norway. But it comes at a hefty price, at nearly $12 per million British thermal units, almost three times the cost of natural gas in the U.S.
Opposition to Fracking, LNG Exports
Not everybody's in favor of the deal, or of an increase in U.S. natural gas production.
Many environmentalists oppose fracking, saying it causes pollution and continues society's reliance on fossil fuels.
And on the same day the deal was announced, a group of U.S. manufacturers including The Dow Chemical Co. (NYSE: DOW) and Alcoa Inc. (NYSE: AA) warned that allowing a big increase in LNG exports from the U.S. would lead to a three-fold increase in natural gas prices.
That, in turn, would endanger $90 billion worth of "gas-intensive investment in manufacturing," which would be "disastrous for our economy and destroy the advantage of our homegrown manufacturers," the group America's Energy Advantage stated in a news release.
But a study commissioned by the U.S. Energy Department and released in December concluded LNG exports would boost the economy.
"The U.S. was projected to gain net economic benefits from allowing LNG exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased," the study found. "In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports."
Investing in Natural Gas Companies
The obvious play for investors here is Cheniere, which already has deals to supply LNG to companies in South Korea, India, Spain and France.
Cheniere has a big competitive advantage over other U.S. natural gas companies, being the only company with Energy Department approval to export LNG.
Meanwhile, 16 other companies are seeking LNG export permits. The Energy Department has placed a moratorium on issuing permits while it studies the effect of LNG exports on gas prices.
Money Morning Global Energy Strategist Dr. Kent Moors saw Cheniere's potential long before most others.
Moors first recommended Cheniere to investors back in March 2011, when LNG was trading around $8 a share. It now trades at more than $27.
Investors can also play Cheniere through its partnership Cheniere Energy Partners L.P. (NYSE: CQP), which offers a 6.35% dividend. (LNG stock does not include a dividend.)
Want to know more about the natural gas companies poised to profit from LNG exports? Check out this Money Morning report: Five U.S. Natural Gas Companies Set to Soar from an Export Boom.
Related Articles and News:
- Money Morning:
Why Japan's Desperately Seeking U.S. LNG
- The Guardian:
US shale gas to heat British homes within five years
- Centrica Press Release:
Centrica signs long-term North American LNG export contract with Cheniere
- Cheniere Press Release:
Cheniere and Centrica Sign 20-Year LNG Sale and Purchase Agreement for LNG Exports from Sabine Pass
- The Wall Street Journal:
U.K.'s Centrica Plans to Import U.S. LNG