The U.S.' Huge Opportunity to Export LNG

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U.S. natural gas companies are selling gas to North American customers for peanuts when they could be getting much higher prices internationally. However, it's currently impossible to ship natural gas from the U.S. to the rest of the world. That will hopefully change over the next few years with the completion of multiple natural gas liquefaction plants to produce liquefied natural gas, or LNG.

The U.S. government is moving slowly and methodically on LNG, but a new report for the Department of Energy on the effects of exporting natural gas should speed things up. Read along and I'll show you the huge opportunity that LNG provides the U.S., how it will affect U.S. companies, and one stock that's a major player set to benefit.

In the past few years, new technologies and cheaper costs allowed producers to access gas trapped in parts of the U.S. that were previously considered unreachable. As more companies have tapped these unconventional plays, U.S. natural gas production has risen roughly 25% over the past five years to a plateau of roughly 65.5 billion cubic feet per day,  or Bcfd for short.

U.S. natural gas production has been stuck at this level for 12 months as supply exceeds demand and the price of natural gas is below most producers' price of production, leaving little incentive to drill. Chesapeake Energy (NYSE: CHK  ) , SandRidge Energy (UNKNOWN: SD.DL  ) , and other drillers have been forced to switch their focus to tight oil and natural gas liquids. These provide profits, as well as some natural gas, keeping the U.S. production levels flat. You can read the full story of the U.S. natural gas market here.

On the demand side, low prices have led to an increase in natural gas usage by power companies and industrial users. Though to really spur a natural gas boom there needs to be more demand for natural gas, which will lead to higher prices and an incentive for entrepreneurs to drill for natural gas.

Where is there demand?
Internationally. The low prices in the U.S. are a stark contrast to the rest of the world.

Source: EIA.

Why don't U.S. companies just sell to Europe and Asia? To ship natural gas, you need to cool it to -260 degrees Fahrenheit so it becomes a liquid and can be safely transported. The problem is, while the U.S. has receiving terminals, we have no liquefying terminals. At a rough cost of $5/mcf to liquefy natural gas and transport it to Asia, five years ago it made no sense for North American producers to ship it, as they were better off selling gas on the continent. 

Obviously, that is no longer the case.

There are huge profits to be had. These will spur the whole industry forward, allow for more drilling, and create jobs to move the country forward.

Companies see this and are putting in for projects. The DOE has approved 17 applications for LNG export facilities to export LNG to countries with which the U.S. has free trade agreements, or FTA. However, the U.S. only has FTA with 17 countries, and none of them need large amounts of LNG.  

In May 2011, the DOE approved Cheniere Energy's (NYSEMKT: LNG  ) application for exporting to non-FTA countries, but the department commissioned a report to study the effects of approving any more, as the DOE has responsibility to make sure new terminals do not "subsequently lead to a reduction in the supply of natural gas needed to meet essential domestic needs." 

If all 16 were approved and built that would give the U.S. an export capacity of 23.7 Bcf/d. While not all are expected to built in the end, even if half were built that would provide a large new source of demand to boost the natural gas industry. 

Source: EIA.

Some members of Congress and companies -- most notably, Dow Chemical (NYSE: DOW  )  -- are against exporting LNG as they view natural gas as a strategic asset. Dow and other American chemical companies have been profiting heavily from cheap natural gas and want that to continue. The DOE has moved forward slowly and commissioned a report from NERA Economic Consulting on "the macro-eonomic impact on the U.S. economy." The company released the report two weeks ago.

The report concluded that exporting LNG is a big net positive opportunity for the U.S. (free trade 101): "...benefits that come from export expansion more than outweigh the losses from reduced capital and wage income to U.S. consumers, and hence LNG exports have net economic benefits in spite of higher domestic natural gas prices." 

Prices would rise but not significantly: "The largest price increases that would be observed after 5 more years of potentially growing exports could range from $0.22 to $1.11." 

American chemical companies are obviously not happy; joining them are high-cost natural gas companies around the world taking advantage of high Asian prices. In the end, a free market is better for the world economy.

How you can profit
Higher natural gas prices will obviously be better for natural gas companies, as well as energy services companies, coal companies, and solar companies.

As the second largest natural gas producer in the United States, Chesapeake Energy would benefit significantly from LNG exports. In the meantime, the company has moved its focus into liquids production,but its share price remains depreciated due to negative news concerning the company's management and spiraling debt picture. While these issues still persist, giant steps have been taken to help mitigate the problems. To learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand new premium report on the company. Simply click here now to access your copy, and as an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.

Read/Post Comments (8) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 17, 2012, at 2:25 PM, kthor wrote:

    I believe keeping Nat Gas cheaper @home is the key for employment improvement numbers in the coming decades, keep America competitive and other economical value with lower Natgas ....but exporting them at higher prices won't hurt though ...

  • Report this Comment On December 17, 2012, at 2:48 PM, jimmy4040 wrote:

    You couldn't be more wrong. Just last week we had the report of overbuilding in the LNG tanker sector, and that the UK is devoting a lot of money to shale gas exploration.

    This is a great big bubble that will burst by the time the first terminals are fully functional in 2017

  • Report this Comment On December 17, 2012, at 2:51 PM, jimmy4040 wrote:

    BTW Asia, is the only feasible place for LNG exports to make money.

    The Russians could undercut LNG in Europe at whim moving their gas through pipelines and still make money

  • Report this Comment On December 17, 2012, at 3:44 PM, amvet wrote:

    First, the US has one LNG export facility, built in 1969, in Alaska. which exports to Asia.

    Second, the NG production from shale and Mississippian Lime decline very rapidly. Without a continuous, massive, expensive, drilling schedule there will be no surplus NG to export.

  • Report this Comment On December 17, 2012, at 4:46 PM, TMFDanDzombak wrote:

    @kthor Low prices will spur manufacturing, and the increased demand will spur more nat gas production.

  • Report this Comment On December 17, 2012, at 4:59 PM, TMFDarwood11 wrote:

    I agree with the article.

    Energy use in the U.S. is a bubble? I think not!

    However, the Obamaphiles think that renewables, which provide 13% of our electrical energy in this country, are the future. Yes, I do agree, but when? and at what cost?

    Natural gas is proven and is available to the extent that our government will make it available (Yes, you can drill, but we won't allow you to build a pipeline to ship that energy to where it has to go).

  • Report this Comment On December 17, 2012, at 5:03 PM, TMFDanDzombak wrote:

    @jimmy4040 How does an overbuilding of LNG tankers hurt the U.S.? If anything that's good for U.S. natural gas companies as they can ship LNG for less.

    On the UK, significant production is years away. Only two wells had been drilled by Cuadrilla Resources in the whole country before the government banned fracking in 2011. The ban was just lifted last week and Cuadrilla hopes to drill 3 wells in the next year to see if natural gas can be drilled profitably.

    Disagree. While Russia could undercut prices in Europe, Europe wants to reduce their dependence on Russia. Russia could always turn off thei pipelines to the EU like they did in January 2009. Europe wants to have other options than Russia.

  • Report this Comment On December 17, 2012, at 5:08 PM, TMFDanDzombak wrote:

    @amvet Correct, there is a LNG export terminal in Kenai, Alaska. It should be noted that it is very small, with a capacity of only 0.2 bcf/d.

    On your second point. Yes, their needs to be continuous drilling to keep production high. If gas could be exported tomorrow, prices would rise to the level necessary to support continuous drilling.

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