Imagine your energy bill increasing by 50% in one day. Pretty scary, eh?
Back in March, this is exactly what happened... in England. In a single day, natural gas prices spiked by 50% there, all because of a failed water pump. As much as this could be considered a fluke accident, there were several factors that led to this single, minute event causing the worlds eighth largest natural gas market to its knees. Let's take a look at what happened, how the U.S. can prevent this from happening at home, and what it will mean for U.S. gas companies.
Blame it on the rain
Or the cold, rather. March of 2013 was the second coldest March ever recorded in the U.K. The unusually cold weather that late in the season led to higher than normal gas consumption. With so much in use and a rather fixed supply, U.K. gas supplies were dwindling. On March 22, a water pump failed and halted deliveries from the UK-Belguim Interconnector, a pipe that delivered about 40 million cubic meters of gas to Great Britain. The shutdown of this gas pipe was simply the straw that broke the camel's back. Gas supplies were so short that storage was down to less than two days' worth of supply, which ultimately led gas prices to surge 50% within hours of trading on the London exchanges.
Ultimately, the pipe got back up and running again, and prices subsided. For many people in the U.K., there was a big sigh of relief. What Europe should consider, though, is the much deeper underlying threat: the delicacy of global energy markets and the threats it poses if a country is not energy independent. Russia's Gazprom and Norway's Statoil (NYSE:STO) supply 40% of Europe's natural gas. With so much supply coming from only two sources, Europe is at severe risk if either of these companies suffers a technical (or political) problem. The only way that Europe can solve this problem is to find a more diverse source of natural gas.
Enter stage left: America
Today, 95% of U.S. imports for natural gas come from Canada. Reliance on a single country this much may be alarming, but our dependence on imports has dwindled rapidly. In 2012, the U.S. imported 32% less natural gas than in 2007, and we anticipate becoming a net natural gas exporter by 2020.
The large uptick in domestic production will have some major implications on natural gas markets. With ConocoPhillips (NYSE:COP) just receiving approval for LNG exports to countries not in free trade agreements with the U.S. at its Freeport facility, and Cheniere Energy's (NYSEMKT:LNG) facility due to come on line in 2015, the U.S. natural gas market will have something it doesn't have right now: an outlet for excess supply. U.S. LNG exports, plus all the Canadian gas we are using today, could be an opportunity for European countries to diversify its natural gas sources and in turn reduce the risk of repeating an incident like the U.K. suffered back in March.
Of course, Europe will not be the only ones that could benefit from a U.S. natural gas supply. Natural gas producers in the U.S. could stand to benefit greatly as well. The problem for natural gas producers in the U.S. today is that they have to play a delicate production game: produce enough to keep revenue growing, but don't produce too much as to flood the market. (See April 2012 gas prices to see what happens when gas companies overproduce.) With a export outlet, this could help to make the gas market more fluid and stabilize gas prices.
Right now, natural gas spot prices are in the $4.00 range. For low-cost natural gas producers like Ultra Petroleum (NASDAQ:UPL) and Exco Resources (NYSE:XCO), a $4 price for gas will be a welcome sight. Exco had written down so many assets because of low gas prices, the company expects profits as long as gas remains above $2.15. Once LNG exports do come on line, an uptick in natural gas prices is expected, but not one that is so severe. More importantly, companies like Ultra and Exco that deal exclusively with natural gas will not have to worry as much about wild price swings.
What a Fool believes
With Freeport receiving its export license this month, it is likely that there are other facilities around the U.S. that will also receive permission to export as well. But, there are enough companies proposing LNG export terminals in the U.S. to export 41% of total production, so it is highly unlikely that all of these facilities will be granted a license. There are still some detractors who would like to see natural gas remain in the U.S., but this situation is unlikely as well. Somewhere in the middle is a balance point that will allow the U.S. to export enough LNG to stabilize prices, and countries around the world will want to get a piece of the action. It's unclear when another price spike like the one in the U.K. will happen again, but with the U.S. playing a bigger role in the natural gas market, the chances of this are less likely.
The Motley Fool recommends Statoil (ADR) and Ultra Petroleum. The Motley Fool owns shares of Ultra Petroleum and has the following options: Long Jan 2014 $30 Calls on Ultra Petroleum, Long Jan 2014 $40 Calls on Ultra Petroleum, and Long Jan 2014 $50 Calls on Ultra Petroleum. 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.