This Deal Signals Big Changes in One Of Energy’s Most Exciting Sectors

There are a lot of under-appreciated changes going on in energy markets right now.

Most of them are driven by unconventional drilling. A phenomenon that's exploded across North America-and changed the game for oil and gas production.

That's had a number of effects. Some obvious-and others very subtle.

Like what's happening offshore. Where savvy exploration and development firms are now moving to apply unconventional drilling technology and techniques. Unlocking millions of barrels of new reserves-and creating industry-leading returns on drilling dollars.

Just this month we saw another step in that saga. With up-and-coming Gulf of Mexico producer Fieldwood Energy buying another shallow-water asset package, this time from SandRidge Energy (NYSE: SD). Fieldwood is paying $750 million for the assets-bringing the company's total M&A budget in the Gulf to $4.5 billion over the last four months.

That's a huge amount sunk on properties in a place most industry insiders wrote off a long time ago as being over the hill in terms of oil output. But Fieldwood obviously thinks differently. And the firm should know-its parent company, energy private equity giant Riverstone Holdings, counts amongst its partners the likes of James Hackett, former head of major Gulf player Anadarko.

We're going to be hearing a lot more about that story. A savvy investor like Riverstone simply wouldn't be putting up billions here if they didn't see a major opportunity. Unconventional, directional drilling is unlocking huge value in these shallow waters.

But there's another part of the U.S. unconventional story that looks even more interesting these days. A space where a big disconnect in global prices-created by prolific shale drilling in America-is creating one of the best arbitrage values the energy market has ever seen.

This explosive opportunity is natural gas liquids.

Production of liquids like ethane, propane and butane is surging across the U.S.A consequence of associated output from natural gas wells in places like the Marcellus and the Eagle Ford. Since 2008, total U.S. natural gas liquids production is up a stunning 45%--amounting to over a million barrels per day of new output.

That's cratered prices for these commodities. Which is bad if you're a producer-but great if you're an exporter.

That's because prices for liquids in big markets like Europe and Asia are still running high. Lately we've seen prices in Western Europe for commodities like propane sitting at a premium of 140% to U.S. rates.

This is creating a massive arbitrage opportunity. It's not often you get to buy something for a dollar and sell it abroad for $2.40.

Firms like Enterprise Products Partners (NYSE: EPD) are moving to ship as much propane as they can-to capture these fat differentials. The firm is expanding its export facilities on the Gulf Coast, looking to service markets in Europe. If the planned Panama Canal expansion goes ahead, selling American propane into Asia is also going to be a very good play.

In fact, Asian buyers are already moving to capitalize on this opportunity. Just look at some of the news this week out of one of the world's fastest-growing consuming nations: China.

Platts reports that two Chinese petrochemical buyers have recently concluded purchase contracts for imported propane. This includes Zhejiang Satellite Petrochemical Company, who will reportedly buy 198,000 tonnes of propane during 2014-with a portion of this being sourced from U.S. suppliers.

This is the sixth Chinese firm to complete propane import deals of late. Total contracted volumes of U.S. propane for 2013 through to 2020 are now at 8.27 million tonnes, according to traders.

With such rapid demand growth, total U.S. shipments of propane have been on a tear lately. As the chart below from the Energy Information Administration shows, U.S. propane exports have risen 180% over the past year.

It looks like that trend is only going to grow stronger-as more propane processing facilities come online in Asia. Plans are on the books for up to 15 new plants in China alone. Meaning there will be an increasing drive to secure import supplies of feedstock here.

That will likely mean some big numbers in terms of overall usage. Combined demand from the Chinese facilities currently being built is estimated at 11.17 millions tonnes of propane yearly-or about 220,000 barrels per day.

At that rate, Chinese demand alone would amount to 60% of total U.S. exports-which have been running about 370,000 barrels per day over the last few weeks.

Amid such explosive demand growth, it's no wonder that U.S. exports are surging, as pictured in the chart above. With demand from other markets such as Europe also remaining strong, the propane export business may well be one of the highest-potential sectors going today across the energy space.