The region surrounding the Caspian Sea, a beast of the oil and gas world, has lain dormant for years. Recent developments, however, could result in a resurrection that would change the dynamics of the oil and gas industry. The countries in this region could potentially spell trouble for America's position as an liquefied natural gas exporter. Let's look at what's going on in the region and how it could affect us here at home.
Finding lost glory
There was a time when the Republic of Azerbaijan, on the western shore of the Caspian Sea, was the center of global oil production. In 1901, the country was responsible for producing more than 50% of the world's oil. After decades of mismanagement, the region went into decline, and its role in the world of oil fell off the map. Today, though, Azerbaijan and the other countries around the Caspian are emerging as having some of the most promising oil and gas fields in the world. The five countries that surround the Caspian -- Azerbaijan, Russia, Kazakhstan, Turkmenistan, and Iran -- hold 46% of the world's natural gas reserves.
The region's distance from areas of demand has been the primary obstacle preventing extensive development of its natural gas resources, as well as its infrastructure's orientation toward the former Soviet Union. This is no longer a concern. Newer gas pipelines -- with more under construction -- originating at the Caspian will allow the region to export 14 billion cubic feet per day to China, Europe, and India, the three largest demand centers for natural gas and LNG, by 2018.
What this could mean for natural gas in America
In terms of domestic natural gas prices, this will probably not have a significant effect. Natural gas markets are still very regional, thanks to the high costs associated with converting natural gas to LNG and transporting it with cryogenic tankers. What could be more worrisome, though, is the effect this could have on American LNG exports. The United States' largest competitive advantage in the LNG market is our cheap domestic source, but we're still subject to those high transportation costs. Cheniere Energy (NYSEMKT:LNG) estimates that the price differential between American and foreign markets needs to stay greater than $6 per thousand cubic feet of gas for LNG exports to make economic sense.
Pipelines are a much cheaper way to move gas; no liquefaction process is necessary. The Caspian region, with its ability to move natural gas via pipeline to the largest demand centers, could take a significant chunk of the LNG market. The combined takeaway capacity of the proposed pipes would be enough to offset LNG demand by 24% in Europe, more than 100% in India, and almost triple China's 2012 LNG demand. If this flood of pipeline gas could bring gas prices in these respective areas within that $6 band, then LNG exporters, particularly those in the U.S. and Canada, could be in rough shape.
What a Fool believes
Cheniere Energy, Dominion Resources (NYSE:D), and Sempra Energy (NYSE:SRE) are probably not as worried about this threat as others. The facilities proposed by these three companies already have all of the marketable capacities under 20-year export contracts. Sempra has yet to receive approval to export to non-Free Trade Agreement countries from its Cameron LNG facility, but there is only one facility ahead of it in the Departments of Energy's approval queue.
For those that don't yet have an export license or fully secured contracts for their facilities, however, this could dampen the mood. One of the indicators of the future prospects of LNG has actually come from Canada, rather than the U.S.: Chevron (NYSE:CVX) has not made a final investment decision on the Kitimat LNG facility because the company has yet to receive sales pledges for 60% to 70% of the facility's capacity. If Chevron struggles to get this project off the ground because of a lack of customers, it could be a bad omen for other prospective LNG players.
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