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As we have discussed on several occasions, there is a revolution occurring on the demand side in natural gas. No fewer than five major advances are hitting that will ramp up the requirements for this fuel source.
What's more, the impact this revolution will have on additional North American production will be far reaching. That's a good thing, since we have far more unconventional reserves than initially estimated. In fact, this new demand is already being felt, providing a floor for ramping up drilling even further.
Four of these sources of new demand are domestic: the transition from coal to gas as a fuel of choice in the generation of electricity, rising use of gas as a feeder stock for petrochemicals, increasing industrial applications, and an accelerated expansion of natural gas as a vehicle fuel, especially in truck and transit fleets. There are even moves to use natural gas as a fuel in railway traffic.
However, it is the fifth source of new demand that is going to change everything. When it comes to how energy is moved, it is the single largest change to emerge in decades.
I'm talking about the developing market for liquefied natural gas (LNG).
Best Investments in Natural Gas and the LNG Revolution
Of course, I've written about LNG in these pages before. It involves cooling gas to a liquid, allowing it to be transported via specially designed tankers. The advantage is that it affords a greater use of existing pipeline networks while also expanding the gas trade worldwide.
You simply liquefy the gas at a terminal on one end and regasify it at a terminal on the other.
The emergence of this trade will fundamentally improve the global energy balance and usher in an age of rapid unconventional (shale and tight gas, coal bed methane) basin development worldwide.
In the United States, LNG exports will also soon comprise a major boon to increasing production without hammering domestic prices. Abroad these exports will become a lifeline…
Rapidly Expanding Markets Abroad
This is especially true in Europe where LNG imports are already establishing spot markets.
Spot markets involve short-term sales that are almost always at a cheaper price than long-term pipeline contracts. The beneficiaries are the end users on the continent, while the primary loser in this case is the Russian natural gas behemoth Gazprom.
This is because Gazprom operates on 20-year contracts that include two particularly disagreeable elements. The first that their price is based on a basket of crude oil and oil product prices. Given the high level of oil prices, that means the cost of gas through these has been continually rising.
The second are "take or pay" provisions each contract contains. These require that a customer take a specified amount of gas monthly (usually at least 70%), or pay as if they had.
Both of these factors are increasing the cost of natural gas substantially in Europe.
The good news for European consumers is that neither is involved in spot purchases of gas delivered via an LNG terminal. And that has prompted lots of people to watch the development of U.S. export potential with considerable interest.
But there is a much bigger story unfolding elsewhere.
The demand for LNG in Europe still pales in comparison to the demands in Asia. Only a few years ago, Japan and South Korea comprised almost two-thirds of the international LNG demand market. These days, with China and others quickly moving in, Asian LNG prospects are moving off the charts.
This a huge development if you're looking for today's best investments in natural gas, which brings me to a couple of major developments in the LNG market that happened yesterday…
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.