Perfect Time to Press the Case for LNG Exports

The crisis in Ukraine has given an excellent opportunity to proponents of U.S. natural gas exports to press their case.

Mar 1, 2014 at 5:12PM

Chesapeake Energy (NYSE:CHK) earlier this week released its financial results for the fourth quarter. The results highlighted the shift in the company's portfolio from being natural gas-heavy to oil-heavy. Chesapeake has been focusing more on oil production as gas prices fell sharply due to the shale boom. The supply/demand imbalance could be removed if the U.S. allows more natural gas exports. The U.S. has been reluctant to do this, but recent geopolitical events have presented an opportunity to proponents of natural gas exports to press their case more aggressively.

The shale boom
The shale boom in the U.S. has completely changed the dynamics of the global energy market. It has also aided the U.S. economic recovery. Chesapeake was one of the companies that bet heavily on the shale gas revolution. However, when supply outpaced demand, gas prices in the U.S. fell to record low levels, making several natural gas projects unviable. As a result, Chesapeake, which is highly geared due to all the acquisitions it made during the boom, has been shifting focus to oil. In 2013, Chesapeake's oil production rose 32% year over year, compared to a 3% decrease in natural gas production.

Natural gas prices surged recently, hitting a five-year high of $6.493 per million British thermal units (mBtu). But the sharp rise was mainly due to the extremely cold weather in the U.S. In the last two days, natural gas prices have come down sharply, falling below $5 per mBtu. More importantly, longer-term natural gas prices are expected to remain around this level. While $5 is well above the record low levels natural gas prices hit in April 2012, it is a level at which oil and gas companies do not have a lot of incentive to undertake new gas projects. This explains Chesapeake's shift to oil production. This could change of course if the U.S. decides to shift its natural gas export policy.

U.S. reluctance
Despite the shale revolution, the U.S. has so far been reluctant to export natural gas. Under current regulations, natural gas can be exported to countries that have free trade agreements with the U.S. Currently, only 20 countries have free trade agreements with the U.S. Exporting to the rest requires approval from the Department of Energy (DOE), which is given on a case-by-case basis. Currently, there is a significant demand for gas from several countries without free trade agreements, including China, Japan, India, and those in the European Union (EU). The DOE only approves export projects if the deal would be in the U.S. national interest, which makes getting an approval a cumbersome process. So far the DOE has only approved six export projects since 2011, the most recent being Sempra Energy's (NYSE:SRE) Cameron liquefied natural gas (LNG) project in Louisiana.

Meanwhile, opposition to natural gas exports has come from unexpected quarters, Dow Chemical (NYSE:DOW) being one. The company believes that cheaper natural gas offers U.S. manufacturers an advantage and this should not be given away by removing restrictions on natural gas exports. But, proponents of natural gas exports argue that the U.S. is not likely to give away its advantage. A study on LNG exports conducted by NERA Economic Consulting and commissioned by the DOE showed that domestic gas supplies and prices won't be affected significantly by natural gas exports. The argument in favor of expediting natural gas export project approvals not only makes sense from an economic perspective, but it also makes sense from a geopolitical perspective.

Ukraine turmoil
The turmoil in Ukraine over the past month, which has led to the ouster of its President Viktor Yanukovych, gives a strong reason to the U.S. to remove restrictions on natural gas exports to countries with which it does not have free trade agreements. The crisis began after Yanukovych abandoned an agreement that would have strengthened Ukraine's ties with the European Union (EU) and instead opted for closer cooperation with Russia. However, the deal with Russia was opposed by Ukrainians, who felt that their country should move closer to the EU. The protests finally led to Yanukovych's ouster. However, the crisis is far from over.

Russia continues to back Yanukovych, and the ousted President also has support in eastern and southern Ukraine, where there are ethnic Russians. The Russians have opposed the EU's support to the interim President in Ukraine. But this is a delicate issue for the EU. The region relies heavily on Russian gas, and in the past, Russia has cut off supplies to the EU. While gas exports from Russia into the EU have not been threatened so far, if the conflict escalates, there is a threat to regular gas supply Russia. This is where the U.S. could come in.

The U.S., with its abundant shale gas, can help the EU in reducing its reliance on Russian imports. Even after taking into account all the transportation, infrastructure, and storage costs, U.S. natural gas can easily compete with Russia's in terms of price. In my opinion, EU countries would be even willing to pay a slight premium for U.S. natural gas if it ensures energy security. It also serves American geopolitical interests. A recent paper from the U.S. House of Representatives Committee on Energy and Commerce also highlights the fact that natural gas exports will bring geopolitical benefits to the U.S. Given the situation in Ukraine, this is the best time for proponents of natural gas exports to press their case.

Something else for OPEC to worry about
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

 

Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers