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 (NYSE:SD), 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.
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.
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.
Follow Dan on Twitter, @DanDzombak, or by liking his Facebook page, DanDzombak. Dan owns shares of Chesapeake Energy.The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts on Chesapeake Energy. 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.