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$2 Nat Gas Blues: Preparing for the Bottom

Kevin Cook

If clean-burning, abundant natural gas is the efficient energy of the future, why is it so darn cheap, hitting 10-year lows this week near $2.20 per million British thermal units (MMBtu)?

That's probably a rhetorical chicken-egg question because a big part of the reason nat gas might be the energy of the future is precisely because it's so abundant, which in turn makes it so cheap.

But in an era where there is vociferous debate about energy costs and energy security due to (1) the rising price of crude oil and (2) US dependence on imports, there are some even more interesting questions to ask about cheap, clean-burning, and domestically-abundant nat gas.

The answers could lead to higher prices and more energy security for the US if things are done right.

First, where did this abundance suddenly come from to drive the persistent down trend since 2009, from $6 to nearly 2/3 lower, to say nothing of price spikes into the mid-teens in 2005 and 2008 that now seem ridiculous?

Mostly because energy companies found ways to more efficiently exploit vast North American shale deposits through advanced hydraulic fracturing ('fracking') technology, accessing untold reserves that lead to supply estimates stretching into the hundreds of years.

Wasn't an unseasonably warm winter a big factor too?

Of course, but it's the growing inventories and proven reserves that are have the biggest effect on the long-term price trend.

Second, what could possibly reverse the course of nat gas prices and thus the fortunes of companies like Chesapeake (CHK), Devon (DVN), and Anadarko (APC) which produce it?

If T. Boone Pickens' Nat Gas Act gets through Congress, subsidizing the conversion of 18-wheeler engines to run on nat gas, will that drive the price higher, or at least lower the price of crude oil?

Probably, but that's a big 'if. And as good as nat gas engines sound for the air and the economy, raising the price of the fuel used to heat most homes and cook most meals in the US might create a public backlash.

And the actual success of the Nat Gas Act legislation walks a field of landmines in the oil vs. gas war where 'big oil' likes the relatively high price of crude and doesn't want cheap nat gas pulling the floor out from underneath them.

How about exporting compressed natural gas liquids (LNG and CNG) to Europe and Asia, where the price of nat gas is much higher -- could this be a good move for US energy security because it will cause those regions to buy less oil from the Middle East?

All of these questions and more were addressed recently at the IHS Cambridge Energy Research Associates' annual conference in Houston. The event was attended by management of top energy names from around the world.

Government Energy Policy (and Politics) is the Wildcard

The biggest concern of energy CEOs in answering the engine and export questions was government commitment and transparency. Energy companies need certainty about energy policy and government intervention for the simple reason that big projects take big investment over time to develop.

Case in point, before we knew there was such vast reserves of natural gas in North American geologic formations known as shales -- the Bakken in North Dakota, the Marcellus in the East, the Eagle Ford in Texas -- there were billions of dollars poured into developing natural gas import terminals in the Gulf.

From a March 7 Wall Street Journal article by Angel Gonzales, who attended the CERA conference...

The energy industry 'must wager billions of dollars on long-term projects that can be rendered useless overnight by new developments.

Some mistakes have already been costly. For example, the plethora of U.S. liquefied natural gas terminals that were built in the last decade, at the cost of tens of billions, in the expectations that shiploads of the stuff from Africa and Trinidad would be quickly snapped up by energy-hungry U.S. consumers.

Now, those terminals are sitting mostly empty, as the last decade also saw the unexpected development of domestic shale resources, which have made the U.S. a natural gas superpower with no need for imports.'

And here is how Exxon (XOM) CEO Rex Tillerson summed it up, referring to the 'political calculations' of the Obama administration in blocking approval of TransCanada's planned Keystone XL pipeline from the oil sands in Alberta to the Gulf Coast...

'In order to meet growing energy demand, our industry needs to be able to plan over 10-, 20- and even 30-year time horizons. Political considerations based on two- and four-year political cycles are a significant hindrance to the long-term planning and investment which can affect jobs and competitiveness for decades.'

King of Nat Gas Exports

Many industry analysts now believe that the US could be the biggest supplier of natural gas to the rest of the world. Some of the companies involved in that export business are Cheniere (LNG) and Golar LNG (GLNG).

Cheniere is building the main export terminal at Sabine Pass in Louisiana and already has contracts going out ten or more years for delivery of hundreds of millions of metric tons of nat gas to Europe and Asia. Golar is a Norwegian tanker company specializing in Floating Storage and Regasification Units (FSRUs) that can receive and deploy liquid natural gas.

But there is, of course, natural resistance by oil companies to having this become a big trend and consequently threatening crude prices dramatically.


Unless big oil actually had a reason to support the full exploitation of our nat gas power through the Nat Gas Act and exports. Say again? I know, the moving parts in this puzzle are enough to make your brain hurt.

Tillerson again: 'Demand for natural gas will increase by 60% over the next three decades, during which time resources will grow by more than 400%.'

Here's what an industry insider and former energy lobbyist told me that clarifies why Tillerson might support the Pickens' plan and exports:

'Tillerson realizes that if US nat gas cannot be liquefied and exported, the rapidly growing demands for energy in emerging markets will be met with overseas (largely OPEC) oil, meaning less availability for that commodity to make up the shortfall here in the US. And that would naturally raise prices (good) but infuriate the US public and the politicians (bad). So, my guess is that for Boone's gambit to have any chance of success, the support of the big oil forces is needed. And that will only come if provisions are included in the bill for LNG exports.'

I think the forces are finally in play for natural gas to be used fully and intelligently in the next few years. Does that mean we won't see a $1 handle on nat gas this year? Of course that's possible. But buying the companies that will best be able to exploit and profit from higher nat gas prices could be one of the best trades of the decade.

Kevin Cook is a Senior Stock Strategist with Zacks.com

CHENIERE ENERGY (LNG): Free Stock Analysis Report

CHESAPEAKE ENGY (CHK): Free Stock Analysis Report

GOLAR LNG LTD (GLNG): Free Stock Analysis Report

EXXON MOBIL CRP (XOM): Free Stock Analysis Report

ANADARKO PETROL (APC): Free Stock Analysis Report

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