Natural gas in the United States is much cheaper than in foreign countries. That has drillers salivating at the opportunity to export U.S. gas. However, today's cheap energy provides the United States a competitive advantage that might be foolish to give away. How do you make sure you win no matter which way the issue gets decided?
The price differential
The combination of hydraulic fracturing and horizontal drilling in shale gas regions has dramatically increased the amount of natural gas produced in the United States. Supply swamped demand and gas prices fell to historic lows, though they've moved slightly higher lately.
That's a huge opportunity if companies can tap foreign demand. And it's gotten political. For example, Alaska recently agreed to buy 25% of a liquified natural gas (LNG) export hub being proposed in that state. It's a potential $6 billion investment, assuming that the state legislature approves the deal.
That would put Alaska soundly in the corner of oil and gas giants like ExxonMobil (NYSE: XOM ) and Royal Dutch Shell (NYSE: RDS-B ) , which are each part of the consortium looking to build the facility. Both of these global energy giants made big bets on U.S. natural gas at what in hindsight was the wrong time.
Shell, for example, noted in its fourth quarter press release that there could be, "...future asset sales and/or impairments" in its U.S. gas operations. Exxon CEO Rex Tillerson, meanwhile, has openly admitted that his company's decision to buy XTO Energy was, "...off a year or two" on its timing.
Being able to tap into markets with higher natural gas prices would help soften the blow and would also likely increase the price of the fuel domestically. That would be a win for Exxon and Shell, while export demand would turn ports like the one Alaska is looking to back into cash cows.
But is that good?
There are some, including politicians, that think low natural gas prices give the United States an edge. For example, Southern Company's (NYSE: SO ) CEO, Thomas Fanning, recently said, "We are seeing more foreign companies consolidating or adding new facilities in the southeast." A key part of that decision is, "...frankly cheap energy relative to other places around the world."
And, "...if we continue on the right kind of national energy policy, we can provide America with unassailable advantage in manufacturing, growing jobs, growing personal incomes." Of course Southern has a vested interest in low gas prices, since it's been increasing its exposure to the fuel and is now the second or third largest gas consumer in the United States.
Southern is hardly alone in the gas switch. Duke Energy (NYSE: DUK ) , for example, has taken natural gas from 5% of its fuel mix to 24% since 2005. And other users like low fuel costs, too. Steel maker Nucor (NYSE: NUE ) partnered up with a gas driller to ensure it was able to get low gas prices, but U.S. gas prices have been so low that it halted drilling because it's cheaper to buy the gas than drill for it; at least for now.
That decision is going to save Nucor $400 million in capital expenditures in 2014. Clearly Duke and Southern don't want to see natural gas prices increase and, thus, reduce the profitability of their government regulated businesses.
Regardless of whether or not gas exports increase, some companies, like Cheniere Energy Partners (NYSEMKT: CQP ) which owns an export facility, appear to have the approvals needed and are well on their way to sending U.S. gas into foreign markets. But even if the approval process stalls, natural gas use is clearly on the rise, so drillers like Exxon and Shell, among many others, look like they'll benefit so long as they can hold out until demand catches up with supply. Nucor, Southern, and Duke show that's happening, albeit slowly.
Low natural gas prices are tough on drillers, but demand is building and will eventually lead to higher prices and profits—which will make them winners no matter what happens on the export front.
Government decisions have been having an impact outside of energy
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