Two years after the Fukushima nuclear disaster, only a few of Japan's 50 nuclear power plants have been restarted. The island nation is increasingly turning to liquefied natural gas to supply its huge energy needs. Here's what this mean for the LNG industry.
natural gas mutual funds
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There's not much to love about an ultra-hot U.S. summer - unless you're investing in natural gas companies.
The record-breaking temps (the U.S. is on pace for its hottest year ever) have made the country crank the AC, lifting natural gas prices and stocks.
To many investors, that may seem counterintuitive. After all, natural gas has been the red-headed stepchild of energy for years.
But prices for this plentiful alternative fuel are just beginning to turn higher after a four-year slide that saw values slashed by more than 80%.
That price decline - from a high of $10.38 per million British thermal units (BTUs) in July 2008 to just $1.83 in April of this year - was primarily the result of a decade-long increase in U.S. gas production, which climbed by 21.6% from 2002 to 2011.
That trend finally has begun to reverse, as the rate of inventory build-up has fallen steadily for almost three months. What's more, the size of the current natural gas surplus relative to year-ago levels has fallen by 23% since late March.
Three big reasons explain this shift:
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The fossil fuel welcomed words from the International Energy Agency (IEA) Tuesday that gushed about the boom in unconventional natural gas over the next two decades. The agency said the incoming supply increase would let the United States and other countries enjoy cheaper energy and shift the export reliance away from the Middle East.
IEA Chief Economist Faith Birol told Reuters that growth in shale and other new available forms of natural gas could mirror gains made in conventional gas in Russia, the Middle East and North Africa combined.
"Unconventional natural gas will fracture the status quo and will be a complete game changer with major geopolitical implications," Birol said.
Over the past years, high natural gas prices were a driving force behind new ventures into previously unavailable, unconventional gas reserves including tight-gas, shale gas and coal-bed methane resources.
But recently, ample stores and waning demand have weighed on natural gas prices, taking the commodity down to record low levels.
However, things are about to change.
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The rise in demand for everything from electricity to petrochemical feeder stock, liquefied natural gas (LNG) exports, and even usage in vehicle fuels, will start driving that price up over the next two years.
You already know that, of course.
We've talked about it many times before.
But now there's something else on the horizon that is likely to provide a boost to investor prospects even sooner.
Utilities, one of the main beneficiaries of the gas boom, are moving to capitalize on the accelerating transition in power generation.
And in the process, two important trends are emerging that will be of interest to retail investors.
First, the low current prices and the prospect of rapid increases in extraction rates, if the market warrants, are allowing electricity managers the opportunity to plan for multi-year cost projections.
That, in turn, is propelling the intensified replacement of aging capacity with new gas-fueled plants.
As Pacific Gas & Electric Co. (NYSE: PCG) CEO Tony Earley noted this week, infrastructure investment becomes a priority when projected fuel prices are low. The system has to be upgraded and replaced in any event, as large segments of it reach the point of "retirement."
Earley also has advanced the idea that the power industry needs to speak with one voice in its dealings with regulators and policy makers.
This need for solidarity has been reflected in comments from other leaders in the power industry as well.
As policymakers increase capital expenditure spending in infrastructure replacement and expansion, we are also likely to see a renewed interest in developing a consensus on where the next "generation of generators" is going to be moving.
And one of the drivers coming onto the scene moves right into familiar - and profitable -territory, at least for us.
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So, as we await the latest developments in the European debt mess, today seems like a good time to answer a few. This time around, I am addressing some of your questions and comments that deal with natural gas.
By the way, my staff and I read all of the input and feedback you send our way, and we're very grateful for it. Please email me at firstname.lastname@example.org. (I can't offer any personalized investment advice, but I can address your questions and comments in future broadcasts.)
Let's get started...
Q: I've just read recently several articles stating that the EIA has revised downward its estimate of our natural gas shale reserve potential by deciding to accept, unconditionally, the most recent U.S. Geological Survey stating that the Marcellus, Eagle Ford, Barnett, and other shale formations hold only 20% of the heretofore accepted reserves. This is an 80% reduction! This changes everything if true.
That's the question - is this bogus, or is there factual evidence to conclusively support this new estimate? ~ Howard B.
A: Howard, this reminds me of a famous statement from the 19th-century British Prime Minister Benjamin Disraeli (though the comment is also variously ascribed to Mark Twain, Alfred Marshall, and many others): "There are three ways to hoodwink the masses - lies, damn lies, and statistics."
The Energy Information Administration (EIA) - a unit of the U.S. Department of Energy - continues to wrestle with the distinction between reserves and extractable reserves.
The first is the volume of gas indicated by field tests and analysis. The second is gas available for extraction at current methods. I would also stipulate as "extractable" reserves only the volume that market conditions allow.
When you equate the two, we are still in the same ballpark.
Current estimates put no more than 20% of known reserves as "extractable." As technologies improve, that figure could improve, too.
For now, the EIA estimate falls in line with most others.
So to answer your question, nothing much has changed here, aside from some government bureaucrats wanting their figures to be more accurate.
Q: Kent, your work appears to be expanding into areas of advisement that could affect the future profitability and wellbeing of nations and their business relationships with existing partners. A delicate balancing act if there ever was one! If such arrangements are not handled carefully, could sanctions and/or military skirmishes be the outcome? Are we facing the possibilities of "gas wars"? ~ Fred P.
I bought a nice position in Cheniere Energy Partners LP (AMEX: CQP). It is not clear to me if they are in a position to benefit earnings-wise from future expansions of the business. Is a future dividend increase in the cards?
- Harry M.
The broadening initiative to export liquefied natural gas (LNG) from the U.S. to Europe and Asia has put a few companies in the spotlight.
Cheniere is certainly one of them.
Actually, we are dealing here with two tradable securities - Cheniere Energy Inc. (AMEX: LNG) and Cheniere Energy Partners LP (AMEX: CQP).
With Cheniere, we have both the company pioneering the LNG exports (Cheniere Energy), and the partnership controlling the company's Sabine Pass terminal on the Gulf of Mexico at the border between Louisiana and Texas (Cheniere Partners).
As my Energy Advantage advisory service subscribers will tell you, we're always discussing the new age of natural gas. This includes the impact LNG trade will have on profitability, and the position of Cheniere in this process. And Cheniere Partners is just one of the high dividend/high return stocks I have identified for them.
Lucrative LNGAs you probably already know, LNG is a major remedy for the accelerating glut of American and Canadian unconventional natural gas production, which runs the risk of oversaturating the market and depressing prices.
Exporting the gas, on the other hand, taps into widening international demand and carries the prospect of actually improving profitability for gas producers in North America, even while the domestic need for the energy does not keep pace with rising supply.
In so doing, U.S. and Canadian producers are simply paralleling developments already in place in Australia, New Guinea, Russia, and above all Qatar - the first dominant gas producer in the world to commit all of its exports to LNG shipping.
This worldwide trend has transformed the LNG trade from import to export.
As recently as five years ago, we were still talking about importing more LNG into the United States, as conventional production declined.
Now with shale gas (along with coal bed methane and tight gas), the unconventional sources provide more available gas than we ever imagined.
The issue now is how to export the surplus gas.
Enter Cheniere's Sabine Pass terminal.
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