Tuesday, March 24, 2009

Will More Liquified Natural Gas Turn this Commodity Global in Nature?

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A quite interesting story via the New York Times; a lot of people toss "crude oil" and "natural gas" into the same "energy" hamper, but they actually have quite different constructs in terms of demand/supply dynamics. [Mar 15, 2009: NYT - As Oil Prices Plunge, a Frenzy of Drilling Ends] It can most simply be described as the difference between an easily transportable, global commodity (crude oil) versus one that is not (natural gas). Hence the latter's supply/demand dynamics have been historically more focused on the localized economy. Put another way, in periods different from now when the entire globe is contracting - natural gas could be holding up in one part of the world, whereas it would be struggling much more in other parts. Versus crude oil which can be shipped quite promptly to wherever shortages are. This is also why Russia has Europe's cajones in an iron grip - since Europe is so dependant on Russian natural gas; and cannot turn to a "global supply" like they could with oil.

On a related note, coal used to act much more like natural gas but one of my thesis for why coal was to boom in latter 2007 was the voracious Chinese demand made it "worth it" to import cheap US coal (weak dollar). Even at the quite high transport costs it still made sense so you took a somewhat localized commodity and made it global. Now the commentators in this article believe with the onset of new liquefied natural gas terminals - this could be the onset of the same happening to natural gas. If so it could have some very interesting permutations for the natural gas bulls - please shake this post towards any old school natural gas bulls; it appears the old world rules will be changing in the coming years. That said, in the interim we know fundamentals will mean nothing as "facts" are to be ignored by commodity happy thesis buyers willing to overlook reality for "thesis". (always a trade to run n gun!)
  • The decline in crude oil prices gets all the headlines, but the first globalized natural gas glut in history is driving an even more drastic collapse in the cost of gas that cooks food, heats homes and runs factories in the United States and many other countries.
  • Six giant plants capable of cooling and liquefying gas for export are due to come on line this year just as the economies of the Asian and European countries that import the most gas to run their industries are slowing. Energy experts and company executives say that means loads of gas from Qatar, Egypt, Nigeria and Algeria that otherwise would be going to Japan, Korea, Taiwan and Spain are beginning to arrive in supertankers in the United States, even though there is a gas glut here, too.
  • With industrial and utility use of natural gas declining, gas prices in the United States have already declined by two-thirds since the summer. Prices are not likely to go down much more, experts say, but an increase in imports is likely to keep them low until the global economy recovers and drives demand back up.
  • That is good news for American consumers and many businesses, since gas provides about a fifth of the power generated by electric utilities and is a vital component for fertilizers, plastics and other industrial products. But it is bad news for proponents of energy independence, who cheered the boom in domestic gas drilling and production over the last four years. (drill baby, drill?)
  • Gas industry executives expect that liquefied gas imports into the United States will at least triple in the second half of this year. (rut roh raggy - could kill yet another "thesis") That comes as domestic producers have lowered their rig count in natural gas fields around the country by 50 percent in the last several months because of the fall in prices, leading to an expected drop in production by the end of the year.
  • Normally a decline in production would result in a rising gas price, leading to an eventual recovery in drilling. But energy executives say that increasing imports will probably delay a recovery in production, which until now depended almost entirely on national market forces.
  • The United States used to have gas bubbles all by itself; now the world can have a gas bubble,” said Donald Hertzmark, a consultant who advises energy companies on international gas projects. “Over the next few years, a globalized gas market will exert a moderating influence on gas prices here in the United States.” For Mr. Hertzmark the decline in natural gas prices will mean a major stimulus for the domestic and world economies. American oil executives see it another way.
  • Rodney Waller, a senior vice president at the oil and gas company Range Resources, called the expected surge in liquefied natural gas imports part of a “pile on” of problems including plummeting demand, prices and credit besetting companies that stretched their exploration and production budgets in recent years to meet expanding demand. “Any time you push the price down, you push down the ability of U.S. independents to add reserves and production domestically,” he said. He warned that some small and midsize oil and gas companies “with debt that are in trouble now will simply get pushed over the brink.
  • Natural gas is becoming a world commodity like oil. It is still loosely connected to world oil benchmark prices and its price, usually set by longer-term contracts everywhere except for the United States and Britain, can diverge widely from one continent to another. Until the last few years, liquefied natural gas was a high-priced necessity for countries that did not produce their own gas supplies or have access to piped reserves; but it now has become a cheap economic driver for countries like Japan with few energy resources.
  • But as more terminals have been built, the amount of gas that is shipped from one continent to another in giant tankers has climbed. And now the emergence of the global market in gas is about to take a giant leap. The global capacity for liquefied natural gas exports of 200 million tons a year will increase by 25 percent with the completion of six new plants in Qatar, Russia, Indonesia and Yemen, totaling $48 billion in investments, and the upgrading of a seventh plant in Malaysia. More large plants are due on line in 2010 and 2011.
  • Natural gas in the United States costs a little over $4 per thousand cubic feet, down from a peak of more than $13 last year. On average, world spot prices for liquefied natural gas cargoes have come down by more than two-thirds since last summer.
[Sep 23, 2008: Chesapeake Energy (CHK) to Pare Drilling for Natural Gas]

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