The Explosive Fight Over LNG Exports

02/06/2013 10:00 am EST


To export or not to export is a battle waging in the natural gas industry, according to Robert Rapier of The Energy Strategist.

There is a battle brewing over the future of natural gas in the US. On one side is the energy industry, which is keenly interested in pursuing exports. On the other are industries that will benefit if natural gas prices remain depressed.

Investors who correctly forecast the outcome of the battle could profit handsomely by investing in the winners.

Last week, Dow Chemical (DOW) decided to sever ties with the National Association of Manufacturers (NAM) because Dow claims that NAM has sided with member companies like ExxonMobil (XOM) in pushing for unlimited exports of natural gas. ExxonMobil has proposed a natural gas export terminal in Texas, and accuses Dow of being “protectionist” in its opposition.

The stakes are high. Over the years, there has been a manufacturing exodus from the US among industries that depend on cheap natural gas as a major input. Producers of chemicals, plastics, and fertilizers would benefit from a continuation of the multi-year slump in US natural gas prices.

The hydraulic fracturing (aka fracking) revolution has increased the supply of natural gas and natural gas liquids (NGLs). It has also depressed prices and led to a manufacturing resurgence in the US. A report from the Yale Graduates Energy Study Group indicated that in 2010, cheap natural gas provided a net benefit to the US economy in excess of $100 billion.

Certain industries will see a major financial benefit if gas prices remain low. The key question becomes whether those benefits—which include improved balance of trade and job creation in those industries—outweigh the cost to industries that suffer from low natural gas prices.

Other winners if natural gas prices remain depressed are companies that are working to build out infrastructure for natural gas transportation. The lower the price, the more compelling the economic incentives for fleet owners to switch to natural gas.

The growth of companies like Clean Energy Fuels (CLNE) and Westport Innovations (WPRT) will be heavily influenced by the price of natural gas.

Finally, consumers also stand to benefit via lower heating and electricity bills. Over the past five years, utilities have made a major switch from coal to natural gas as a cleaner and more economical option for producing electricity. In 2008, natural gas was used to produce 20% of America’s electricity, but by 2012 the natural gas share rose to 30%.

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A number of studies have concluded that the effect of increased exports on natural gas prices would be mild. Most studies indicated the potential for a price increase in the range of 5% to 10%.

Which side will win out? Ambitious LNG export facilities are already in the works. Cheniere Energy’s (LNG) master limited partnership, Cheniere Energy Partners (CQP), is planning a 2015 startup for an expansion of its Sabine Pass LNG facility that will permit natural gas liquefaction and therefore export.

Unless our shale gas resources are grossly overstated, expect projects to export LNG to push forward. There will be resistance among some lawmakers, and among environmentalists who oppose any further development of fossil fuels, but economics will ultimately win out.

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Related Reading:

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4 Ways to Get Down and Dirty in the Energy Patch

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