Just as the 19th century was shaped by coal and the 20th century by oil, people in the energy industry say this century will belong to natural gas.The New York Times, 15 June 2005
This is a golden age for oil and energy investments. Either that or a fiery sunset that ends with oil and resource wars.
But I prefer to look on the bright side. And amid the uncertain conditions of our changing petro-political world, liquid natural gas will certainly assume a prominent role. LNG demand is likely to rise from 120 million tonnes in 2003 to 200m tonnes by 2010, and then on to 315 million tonnes by 2020, according to estimates from the International Energy Agency.
As I see it, there are two major opportunities for energy stock investors with LNG – terminal construction and tanker construction. It’s a question of getting the right mix of LNG investments into your portfolio. Today, I’d like to take a look at where the real opportunity may await us.
According to a consultancy in the LNG industry, there were only 151 tankers able to transport liquid natural gas in operation in October 2003. And no wonder. Because of the rigorous specifications, the average cost of an LNG tanker is about $160m. According to the International Energy Agency, that’s more than double the price of a crude oil tanker that could carry four times as much energy potential.
Yet despite the cost and seemingly poor comparison with oil economics, there were 55 LNG tankers under construction as of last year. Forty-six of them are designed to carry 138,000 cubic metres, which translates into about 2.9 billion cubic feet of natural gas. LNG Shipping Solutions also notes that the ships currently under construction would raise the total fleet capacity by 44%, or from 17.4m cubic feet to 25.1m.
Thus, in the short- to medium-term at least, the most urgent opportunity for you to invest into LNG does not lie in tanker construction. Instead, look at the bottlenecks developing at the few ports in the Western world which can actually unload and process the LNG those tankers carry.
There are only four terminals in the United States where LNG tankers can unload their precious cargo – in Georgia, Louisiana, Maryland, and Massachusetts. More are coming. In mid-June, the US Federal Energy Regulatory Commission (FERC) approved the $600m Vista del Sol project near Corpus Christi, Texas. Six new LNG terminals have been approved for construction in the Gulf Coast. But it’s not going to be plain sailing.
Officials in California, Massachusetts, and Florida are all raising objections over off shore terminals and the potential for terrorism. The Bush administration is taking the decidedly non-conservative position that a Federal agency, the FERC, should have the final say, even over local objections.
But leaving aside the political debate, what’s the future for LNG use and what are the investment implications? The New York Times article I quoted above continues: ‘Natural gas is expected to overtake coal and rival oil as the leading fossil fuel in the world by 2025 – sooner if the largest energy concerns get their way. They are pursuing more than $100 billion in projects to create a global market for gas that will be increasingly vital to generate electricity, heat, and cool buildings, manufacture the fertilizers that help feed the world and even run some vehicles.’
Will natural gas-rich countries like Qatar, Iran, Venezuela, and Russia become a modern version of OPEC? Will the US and Europe face yet another cartel manipulating the price of energy for an energy-addicted economy?
Not likely. Nation states are going to need help developing and transporting their gas reserves, turning the bounty of nature into a product they can trade for hard currency. But in a way, today’s developments do suggest that gas-rich countries are sitting on a kind of capital not even Alan Greenspan at the US Federal Reserve can manipulate: energy.
It takes energy to run the world. Energy is now becoming its own kind of vital and scarce capital. Those who find it, produce it, transport it, and sell it are going to become this century’s most successful capitalists. But the risks to the losers are massive – and growing.
The increasing reliance on gas is even starting to impact the political ties between America and Britain. Tony Blair may have taken the UK to war to help defend what he still thinks is a ‘special relationship’. But Washington has no compunctions about out-bidding the UK for natural gas supplies.
More than 90% of the American power plants designed and built in the 1990s are powered by natural gas – rather than water, oil, or coal. The New York Times reports that the US will be the world’s largest LNG market by 2015, accounting for 20% of the world’s gas consumption, or just slightly less than its current share of oil consumption.
‘LNG imports to the handful of terminals that exist in the United States soared 29 per cent last year,’ the paper says, ‘and are set to increase throughout this decade.’
The United Kingdom, however, sits at the end of Europe’s gas pipeline. And soaring US imports may come at the expense of the UK. The 16 June edition of the The Times reported that recent cargoes of LNG, originally destined for the UK, have been diverted to the US, where the gas commands higher prices. LNG analyst Steven Smith says: ‘The mix of gas supply is changing. If America pays more and LNG is diverted, we [the UK] will be worse off.’
The UK itself is running out of North Sea Brent crude and natural gas. It’s forecast to become a net importer of oil by 2007. Britain also finds itself in the familiar – but in this case, unenviable – position of being physically isolated from the rest of the continent. That means when it comes to the large gas pipelines that run from Russia into Western Europe (Russia supplies Western Europe with over 35% of its natural gas), the UK is last in line.
It’s exactly the kind of energy dilemma many nations are scrambling to solve. India, for example, has just entered into a $20 billion deal with Iran for the purchase of LNG, starting in 2009. India and China have the good fortune of being in relative physical proximity to the world’s large gas reserves in Russia and China. That’s why you’ve seen the flurry of pipeline deals in the last few years.
I’ll be following this story, and LNG stocks, for the rest of the year. One direct consequence of the soaring oil price… nearing $60 per barrel this week… is that other alternative sources of energy become more economic.
But I wouldn’t use the word ‘alternative’ too loosely. LNG, for example, is AN alternative, in the sense that you begin to seriously consider it once getting your energy from oil costs $100 a barrel. But the energy needed to fuel today’s high-consumption Western economies will have to come from somewhere. The first place to look is where it has already been discovered.
True – cooling gas to a liquid state… then shipping it halfway around the world… to warm it up and deliver it… doesn’t seem economic. But as Charif Souki, the head of Cheniere Energy, says: ‘Going without LNG requires making some difficult lifestyle changes in the way we consume our energy. If you have a better alternative, then please pursue it.’
Investors everywhere – and especially in Britain – take note.
By Dan DenninFor The Fleet Street Letter
Category: Economics