Why the Coming LNG Boom Is the Real Deal

Last week, Sempra Energy (NYSE: SRE  ) won a final approval for its liquefied natural gas (LNG) export plant in the U.S., making it only the second such approval. Sempra's Cameron LNG project is expected to be fully operational by 2018. LNG prices have remained strong over the last three years, thanks to robust demand from Asia. The LNG market has benefited from the shutdown of nuclear power plants in Japan post the Fukushima disaster in 2011. The shutdown of nuclear power plants has forced Japan to import more LNG to meet its energy needs. The big question for Sempra will be whether the rally in LNG will continue in the long term.

Sempra gets final approval
Last week, Sempra Energy received final approval to build an LNG export terminal. This is only the second such approval given by the U.S. government, which places restrictions on LNG exports. The U.S. only allows exports to countries with which it has a free trade agreement (FTA). For exporting to non-FTA countries, which includes the 28 countries in the European Union and allies such as Japan, an approval is required from the Federal Energy Regulatory Commission (FERC) and the Department of Energy (DOE).

Prior to Sempra's Cameron LNG project, the only LNG export project approved by the government was Cheniere Energy's (NYSEMKT: LNG  ) Sabine Pass. Both projects are located in Louisiana. While Cheniere is expected to start exporting LNG in 2015, Sempra expects its Cameron project to be fully operational by 2018.

Both Cheniere and Sempra will be hoping for strong LNG prices.

LNG rally
LNG prices have remained high over the last three years thanks to robust demand, especially from Asia. Japan's shutdown of nuclear power plants post the Fukushima disaster in 2011 has boosted demand for LNG significantly. Prior to the Fukushima disaster, nuclear energy accounted for 30% of Japan's power generation. However, with the shutdown of power plants, the country has been importing more and more LNG to meet its energy needs.

The LNG market is also seeing strong demand for countries such as South Korea, China, and India. Demand has been strong in Latin America as well.

Over the past three years, LNG prices have doubled. According to Bloomberg, prices averaged $16.51 per million British thermal units in 2013. More importantly, LNG prices could remain high in coming years, which augurs well for the likes of Cheniere and Sempra.

Prices to remain strong
LNG prices are expected to remain strong over the next few years, driven by demand from Asia, especially China.

China has been looking to cut its reliance on coal to meet its energy needs. The world's second-largest economy plans to increase the share of natural gas in its energy mix. Recently, China signed a major gas deal with Russian gas giant Gazprom (NASDAQOTH: OGZPY  ) . Gazprom will supply 38 billion cubic meters of natural gas annually to China. But China's natural gas demand is increasing.

According to the International Energy Agency (IEA), China's natural gas demand is expected to almost double by 2019. In fact, China will be the key driver for global gas demand, which is expected to rise by 2.2%. The IEA expects much of the demand to be met by LNG.

In a recent report, Qatar's QNB Group also noted about strong demand for LNG. The group noted that the trend will continue, driven by two factors. The first is energy demand in Asia, which is expected to remain strong even after taking into account a slowdown in China. The report notes that countries like China, India, Indonesia, Malaysia, Pakistan, and Thailand have only just started to focus on LNG for their energy needs, and their reliance on LNG supplies will grow over the next few years. The second factor, according to QNB, is China's switch to cleaner energy. These two factors would mean that global demand will continue to outpace supply, notes QNB in the report.

Japan, which is the largest importer of LNG, had said in a recent energy plan that there is a future for nuclear in the country. However, it is unlikely Japan's reliance on nuclear energy will be the same as it was before the Fukushima power plant meltdown. Therefore, the country will remain a major LNG importer.

Following the crisis in Ukraine, Europe has been looking to reduce its dependence on Russian gas. The continent could increase the share of LNG in meeting its natural gas needs in the future as it looks to cut reliance on Russian gas.

All these factors mean that LNG prices are expected to remain high in the coming years. That is certainly good news for Cheniere and Sempra Energy.

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  • Report this Comment On June 26, 2014, at 11:09 AM, amvet wrote:

    The real question about LNG exports from the USA is ""will there be gas to liquify""?

    Non-shale gas production is declining. Shale gas production declines very fast and production increases are possible due to massive drilling of new wells. The EIA publishes monthly data on 6 shale areas. This shows the monthly production from new wells vs the decrease in production of old wells.

    Here is some recent monthly data by field showing how much of the new production is offset by the production decline of older wells

    Bakken .....73.4%

    Eagle Ford 71.1%

    Haynesville 93.2%

    Marcelllus 59.2%

    Niobrara 85.0%

    Permian 66.2%

    Drilling a well is expensive and if the number of new wells drilled drops by, say, 30% the fat is in the fire.

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Varun Chandan

I have a Master in Finance degree from IE Business School in Madrid. I use the top-down approach when it comes to investing. I like to analyze macroeconomic factors and how they impact individual companies.

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