Just when you think it can’t get any worse in the natural gas industry, it does.
A glut of gas in the United States as a result of lower demand because of the Great Recession and greater than projected production from the gas shales of Texas and Oklahoma has driven natural gas prices below $5 per million British thermal units (BTUs). Natural gas closed at $4.85 on November 30.
Commodity traders, though, have started to get optimistic that a recovery economy would need more natural gas. Enough more to push up prices in 2010. Wall Street projects that natural gas prices will hit $6.09 per million BTUs in 2010.
But that optimism arrives just in time to get killed by a surge of natural gas imports from countries such as Qatar and Algeria.
 Those countries have extremely low production costs and they ramped up construction in 2002 to 2008 of new liquefied natural gas plants for turning natural gas into a liquid that can be sent to U.S. and other overseas markets by ship. During that period natural gas prices were high and seemed headed higher. As a result of those new plants now coming on line Qatar will increase its annual liquefied natural gas production capacity by 43% by the end of 2010.
Add that to a U.S. natural gas industry where production is at its highest level since 1974 and the wonder is why gas prices, as high as $13 a million BTUs in 2008, aren’t even lower.
Unfortunately, for other producers Qatar is the world’s most efficient producer—even after you tack on the cost of liquefying the gas. Qatar can pump a million BTUs of natural gas for just 15 cents. That compares to about $4 per million BTUs for overseas competitors such as Norway and Russia, according to the International Energy Agency. Add another $2.83 per million BTUs to liquefy the gas and you’ve got a total production cost of just $2.98. That’s low enough to undercut Norway, Russia, and even most U.S. producers.
No wonder that U.S. imports of liquefied natural gas are projected to increase 34% in 2009, according to the U.S. Department of Energy, and to jump another 40% in 2010.
That’s good news for anyone who heats a house with natural gas or any company that uses natural gas as a feedstock to produce, say, fertilizer or plastics.
But that projection almost guarantees another year of pain for U.S. natural gas producers.
I am also skeptical about LNG.
Here is my thinking … India and China are the most likely projected customers for it, since their own resources are not sufficient to cover their growing needs, and Russia and Iran, the closest neighbors with NG reserves, do not have a cheap way of transporting NG to them. The US can fill their needs with their own gas, and LNG does not really compete with locally produced NG. However, in the most recent years, indeed, gas production peaked and there is overproduction of NG.
To make a long story short. I think US producers will not see competition from the outside world.
P.S. Who know how to buy HNU? Scottrade does not have it (at least, I couldn’t find it).
I am not sure I believe the numbers for LNG.
The initial cost of the gas in the areas mentioned are cheap for sure as they would flare it otherwise. There are costs to liquify, transport, turn it back to gas, compress and transport. Plus there are foreign markets for gas that could keep the LNG prices higher than US produced gas.
I am still not certain that the infastructure is in place to allow LNG to be a big player in the USA at this time. I am sure it will have some impact on prices, but how significant is in question.
RE:DPM or whomever
That translates into 3K a year in dividends, and if the market stays flat, I am way ahead of the gain. Bot HTE, PWE, BTE , MWE, PVX, PGH all at lows, high dividends 10-14% range. Oil and Nat gas are king until solar gets very cheap, which is going to be at least ten years from now. To me, it is a no brainer, and right now I am cleaning up. I mean, seriously cleaning up. No guarantess for the future, of course I know.
Too late to buy most of these now, especially MWE, but PWE is the largest of the Canadian trusts, and is still undervalued. I know the oil biz, and I can’t believe the opportunities here. They sold more cars in China and India, respectively, that sold in the USA this year. Remove Ur blinders, folks. The next oil crunch is going to come, and when it does, it will be major. Long term play though, you day traders stay away or get burned!
Bot 30k DPM paying 9.5%, and I am going to hang with it 10 yrs, any complaints? We have to realize that perpetual motion is not going to be invented soon, and the morons in the USA resist nuclear etc with a vengeance. This may be the best buy in hold over the next 10 yrs you will ever see, especially if the Obummer faschists get their way with cap and slap legislation. Go Al Bore!
XOM is one way to play Qatar Liquified Natural Gas. Although XOM is a big company.
no wonder STO has crashed lately. :/
Jim,
With the impending split of Encana what half of the company would you invest in for the long term?
Thanks