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US Liquefied Natural Gas Exports: Next Big Thing?

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Should the US take advantage of cheap natural gas and limit access to its supply, or continue on the lucrative exporting track.

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As Punxsutawney Phil saw his shadow last Thursday – which would predict six more weeks of winter – surely several natural gas (UNG) bulls grinned at their trading desks.

Perhaps, finally, a strong and steady cold front would necessitate increased demand for heating, and in turn, increased demand for natural gas. One week later, however, his prediction has yet to come to fruition – natural gas continues to trend in the bleak $2.40 to $2.60 range for the March futures contract (NGH2), settling at $2.477 on Thursday afternoon.

In addition, yesterday's Energy Information Administration data release painted a somewhat bearish picture for the market. The EIA reported a 78 billion cubic feet (Bcf) draw from underground storage, slightly below the 84 to 88 Bcf range that analysts had forecast according to Platts, a provider of energy information and news.

Prices jumped on news that Chesapeake Energy (CHK) had already decreased production by slightly more than 0.5 Bcf per day with a total potential cut still projected for 1.0 Bcf, but fell after digesting the more bearish EIA data.

Baker Hughes reported, for the week ending February 3, that natural gas rig count was down 32 from the previous week to 745 total rigs. Year-over-year, the count is down more than 18%, from 911 gas rigs on February 4, 2011. As has been the case in the last few months, even as rig count sits significantly below the previous year's corresponding figures, the combination of increased production from shale plays as well as lackluster demand across the nation due to mild weather has brought working gas in storage to record levels.

According to the EIA, stocks as of February 3 were 2,888 Bcf, an astonishing 714 Bcf, or 32.8%, over the five-year average. The EIA forecasts that withdrawals will leave gas in underground storage above 2,000 Bcf for the first time since March 1983. With each rig yielding more on average than has been the case in the past – to overcompensate for decreased rig count – the spot price for natural gas is off just less than $2 from the same time last year.

In stark contrast to prices at the Henry Hub pipeline intersection, Cheniere Energy (LNG) is up over 11.4% on the week. This uptick came following an earnings call from Frank Chapman, CEO of BG Group (BRGYY.PK), during which he reaffirmed the company's view that liquefied natural gas exports will be essential to satisfying world energy demand in the coming decades.

BG Group plans to purchase 3.5 million metric tons per year (mtpa) from Cheniere's Sabine Pass terminal once it is up and running in 2015. BG Group has already received authorization to export approximately 15 mtpa from their Lake Charles terminal, beginning in 2015 as well.

In addition, Cheniere has sealed purchase agreement deals with both GAIL (India) Limited (GAILF.PK) and Korea Gas for export from Sabine Pass. Cheniere has also filed for Department of Energy approval of its Corpus Christi terminal. Barring major setbacks, this project is set to be ready for physical export in mid-2017.

Still, despite the construction of several Cheniere export terminals that will be completed within the next few years, Chapman claims that natural gas exploration and production may not be able to keep up with growing demand.

On January 19, the EIA released a report that projected that in the most extreme scenario, where there is "the rapid introduction of 12 Bcf/d of exports" along with "pessimistic assumptions about the nation's natural gas resource base," prices could rise as much as 54% by 2018.

Such reports, in addition to the environmental hazards of hydraulic fracturing, have brought recent criticism from the Sierra Club regarding Dominion's (D) plan for its Cove Point liquefied natural gas terminal. Similarly, the Jordan Cove export terminal, along with the related Pacific Connector pipeline, has received disapproval from Democratic Senator Ron Wyden of Oregon and protest from environmental groups such as Cascadia Wildlands.

For the sake of perspective, however, one must recall that natural gas had a handle on the $12/MMBTU level only a few years ago. The EIA points out that prices in liquefied natural gas-exporting regions like East Asia are in the $16 range. This presents a high profit margin opportunity for companies willing to invest in infrastructure that would deliver the commodity out of oversupplied nations like the United States.

Although not mutually exclusive, the debate comes down to two general viewpoints – whether the United States should take advantage of cheap natural gas while limiting access to supply or continue on the track to exporting liquefied natural gas, which could well become an industry that is both lucrative and creates several thousand new (and permanent) jobs.
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