Domestic consumption of oil has fallen off by more than 10% over the past decade, while U.S. production has increased more than 30%. Natural gas demand has increased 6%, largely as a result of displacing coal to produce electricity; however the 30% increase in gas production, combined with oil, has led to the U.S. becoming a net exporter of oil and oil-based products for the first time in more than a decade. This trend is expected to continue:
Texas-based Cheniere Energy (NYSEMKT: LNG ) and subsidiary Cheniere Energy Partners (NYSEMKT: CQP ) are leading the charge in developing export capability for natural gas, constructing a massive liquefaction facility at the company's Sabine Pass terminal. To date, the company has secured more than $7.5 billion in both debt and equity to fund construction of the first four (of six planned) trains at the site, and it's expected that the final cost will be much higher before production starts, at "the end of 2015, at the earliest," according to the company's 2012 annual report.
This facility will be the first new large-scale liquefaction facility in America in 40 years, and every drop of the more than 27 million tonnes per year (mtpa) processed at this facility will leave American shores for foreign markets. Sempra Energy (NYSE: SRE ) is also in the early stages of a large joint venture LNG export project, which is expected to produce more than 13.5 mtpa of LNG for export.
Just as the U.S. has reached the point where we are a net exporter, does it make sense to increase exports of this hard to access and irreplaceable asset? What about energy independence? Does it matter to investors? Let's take a closer look.
Is breaking the foreign oil addiction better?
According to Clean Energy Fuels (NASDAQ: CLNE ) CEO Andrew Littlefair, the North American diesel market for trucking is 25 billion gallons. Add in the 24,000 locomotives, and the diesel market is as large as 42 billion gallons, 30% of which could be shifted to cleaner-burning and less expensive natural gas with $15 billion-$20 billion in LNG infrastructure, according to a General Electric white paper. While a $20 billion investment sounds like (and is) a massive spend, the potential impact on reducing foreign oil imports by another 12.6 billion gallons, or 300 million barrels, is significant. At $100/bbl, that's $30 billion per year that stays on U.S. soil -- a net $60 billion swing in the trade balance.
Clean Energy Fuels is trying to help make this happen, with its America's Natural Gas Highway network of more than 150 LNG (and CNG) stations that will give over-the-road trucking and shipping fleets access to natural gas in the busiest and most important shipping corridors in North America. This is in addition to the more than 300 public and private CNG stations the company already operates.
How large would the impact of converting 30% of domestic diesel to natural gas be? Consider that Clean Energy Fuels is North America's largest supplier of natural gas for transportation, and it will only deliver around 200 million gallon-equivalents in 2013. This is less than 2% of the potential market if only one-third of the diesel market shifted to natural gas.
Value of exports
On the other side of the coin, the two facilities being constructed by Cheniere and Sempra will produce 30.5 mtpa of LNG, which is equivalent to 273 million barrels of oil per year just at these two sites. What's that worth on the export market? When converted to million British Thermal Units (mmbtu), these two facilities will produce just under 1.5 billion mmbtu, with an approximate domestic annual value (based on current spot prices of $3.50 per mmbtu) of $5.2 billion. However, the export value could easily be between $10 billion and $15 billion annually just for these two facilities.
On the surface, this makes it look like the export value of natural gas is significantly less than using it domestically to further offset our dependence on oil, but it's not that simple. One barrel of oil produces much more than just diesel and gasoline, with the numerous byproducts serving a number of industrial purposes in addition to the value of oil in petrochemical applications. Importing some oil for these purposes, as well as its value as a fuel for transportation will remain important, if nothing more than as a hedge against depleting domestic supplies too rapidly.
Final thoughts: massive resources and massive opportunity
The simple fact remains: We are producing more natural gas than we are consuming, and with natural gas prices in international markets like Japan and the U.K. easily being double or more than domestic prices, it makes sense to continue expanding our export capabilities. These are viable markets, and our long-standing relationships with these international allies gives us access to commerce that adds value to American lives.
Proved reserves and IEA estimates for future reserves point to there being somewhere in the neighborhood of a century's worth of domestic natural gas, so there's little reason why the next decade won't see both continued exports of natural gas, as well as further domestic shifting away from diesel as a transportation fuel. With global demand for cheap energy only set to continue to increase, there's little reason to see natural gas exports as being a bad thing. For patient investors, Cheniere and Clean Energy Fuels could be big winners in the next decade.
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