US LNG Exports … Who We Like

This is it … the US Department of Energy is expected to decide on US natural gas exports this summer, and President Barack Obama has already suggested that the US could become a net exporter by 2020. At stake immediately are over 24 applications for natural gas exports to companies in countries that do not enjoy free-trade agreements with the US.

America now enjoys record gas supplies with prices only 25% of those in Europe and Asia, and as it stands we're probably looking at 25% growth in US gas supplies by 2035. The European spot price is around $10 per million B.T.U.'s, while the Asian spot price hovers around $15, or higher.

While US natural gas exports have doubled since 2007, those exports have gone only to Canada and Mexico … we're convinced that is about to change, and we might be only weeks away from a decision.

Check out these new markets:

Europe

With the exception of Norway and Demark, European countries are all net energy importers. Italy is the biggest importer-at about 75%, followed by Germany (50%), and France (40%, despite its nuclear prowess, just to top off the list. Europe's economic growth, then, could actually hinge on getting its hands on cheap US natural gas.  Never has it been more urgent for Europe to replace Russian gas and its high prices fixed to the price of oil with something more feasible economically-something that would make Europe less vulnerable. And here's where the geopolitics comes in to make it much more attractive for the US administration to allow the country to become a net exporter of natural gas. Even a continual supply of US natural gas to Europe in modest volumes would help it reduce its dependence on Russia and deal a blow.

(even if temporary) to politically influential Russian gas giant, Gazprom.

Right now, geopolitics appears to be trumping concerns that natural gas exports could negatively affect the US economy, hurting retail, commercial and industrial consumers by leading to a rise in gas prices.

Asia

Japan, China, and India could all be major new markets for cheap US natural gas.

India is all over this, and finding it hard to contain its excitement at the prospects of getting US natural gas. India's ambassador recently opined that there was a "clear and present benefit to India, if exports of US natural gas are permitted …" Indian companies have already been gearing up for this eventuality, investing heavily in LNG terminals in the US.

The market we really like, though, is Japan, the world's largest buyer of LNG, which is gearing up to launch the first-ever LNG futures contract. Within two years we should see the first futures contract for LNG on the Tokyo Commodity Exchange-in US dollars and based on an index price for spot cargoes delivered to Japan. So two years from now, the hedging can begin (right now, LNG prices are linked to oil prices). In 2012, LNG was a $64 billion market in Japan.

But there will also be more competition. New LNG projects coming on line soon in Australia, Canada and Mozambique, most notably, and in the Levant Basin as well, mean US exporters won't have a free ride here.

If more natural gas export licenses are granted by the US federal government, the big dogs of natural gas production will soar on the guarantee that their massive drilling for gas won't lead to a continual downward spiral of gas prices. These are the companies to keep an eye on-they will reap some significant rewards here:

Cheniere Energy

Houston-based Cheniere's early gamble on US natural gas was a massive flop when fracking led to a plummet of gas prices from $14/thousand cubic feet in mid-2008 to $4/thousand cubic feet only a year later. This, after the company had dumped $2 billion into a natural gas import facility, and convinced Chevron and Total to sign on to a 20-year, $250 million/year natural gas import agreement. Cheniere's stocks plummeted. But was what intended to be a high-paying short-term import gamble, has turned into an even more lucrative long-term export gamble. Now it's sitting pretty to take advantage of a US natural gas export future.

Cheniere owns that Sabine Pass liquefied natural gas (LNG) port in coastal Louisiana. The facility can hold 17 billion cubic feet of natural gas, which is equivalent to 25% of daily US consumption. By 2016, Cheniere will have its LNG processing plant up and running and will have the capability of exporting 500 million cubic feet of gas/day. By 2019, Cheniere will have built five more facilities with a $12 billion investment, if all goes as planned.

All said and done, the company will be able to control around 4% of the US' natural gas exports. 

Here's the best part: Cheniere has already been granted to ONLY permission to export natural gas outside the confines of the free-trade agreement. The company has signed contracts with LNG importers in the UK, Spain, South Korea, India and France so far.

Cheniere's big competitor, however, will be giant Exxon Mobil Corp., which has just announced plans (with Qatari partners) to build a $10 billion LNG facility in the Gulf Coast port of … Sabine Pass. The joint venture deal-Golden Pass Products LLC-is contingent on what the US government decides on LNG export expansion. If that decision is positive, the Exxon Mobil facility could export up to 15.6 million metric tons of LNG annually.

As for Cheniere, its Sabine Pass LNG terminal will be the extra-FTA pioneer. It will come on line with 2.6 billion cubic feet per day capabilities in 2015. This will be the litmus test.

Chesapeake (CHK)

Chesapeake is already a great buy and already looking at upside growth, and it's working to divest its non-core assets to focus on its real value (to the tune of $4-$7 billion this year), which we noted in last week's newsletter. If more natural gas export licenses are tossed out there, Chesapeake will look even sweeter.

Who might NOT benefit? Royal Dutch Shell (RDSA)

While Shell is the clear leader in everything LNG, once the US opens up its export market, it could be one major that won't benefit. If exports from the US suddenly surge, it could lower prices for gas in Europe and Asia, the latter being a huge market for Shell's LNG. Some 75% of Shell's LNG already goes to Asia.

Overall, though, Shell is the big dog in the LNG game, already having invested a whopping $40 billion in LNG, LNG processing and production facilities and storage terminals. The company control about 7% of the global LNG business and is looking to double that with new projects coming online and a hungry eye for acquisitions (in February it bought Spanish Repsol's LNG business for $6.7 billion). 

In the meantime, we are watching the DOE and holding our breath. Of the nearly two dozen non-FTA export applications out there, some analysts think only three will make it through in this first round. Of the 12 export terminal projects on the list, Moody's thinks only three will get the green light (aside from Sabine Pass): Freeport LNG Expansion, Dominion Cove Point LNG and Cameron LNG.