LNG: Betting on Distant Future
One Company's Gamble <
Collapsing natural gas prices and oil prices may have a geographic center, the Gulf Coast of the U.S. and Fort Worth, Texas.
A $1.7 billion market cap company, Cheniere Energy (AMEX: LNG) is going where few dare in the United States, liquefied natural gas.
The company's CEO has battled against the odds, and gathered some hefty support along the way, and may be way ahead of his time.
Yet, this risky bet is not without cost, as Cheniere has only made money in two out of the last fourteen quarters.
Against The Grain
Cheniere has enlisted the help of Sempra Energy (NYSE: SRE) and Exxon Mobil (NYSE: XOM) in order to develop and build three liquefied natural gas terminals (LNG), with price tags that start at $600 million, in a key area of Louisiana.
The companies are aiming to have the terminals operating by 2011, with an expected goal of doubling the ability of the U.S. to process liquefied natural gas.
LNG is natural gas that is frozen and transported by tankers across the oceans. LNG terminals process the LNG and transfer the thawed material to traditional pipelines and storage facilities, from where it is treated as "normal" natural gas.
This is a huge contrarian bet, as natural gas prices have been plunging, as has the stock of Cheniere. According to the New York Times, LNG is heavily out of favor at the current time.
In fact, as the Times reported: "It has been 24 years since anyone on American shores has built a new liquefied natural gas terminal. Two of the country's four existing onshore terminals, which dock tankers the size of aircraft carriers ferrying supercooled gas from places like Qatar and Trinidad, were mothballed for years because production at home was plentiful and prices were low."
According to the Times, LNG CEO Charif Souki, despite falling natural gas prices and his falling stock price (down 43% since April 2006) "says he is fixed on the longer view" while noting that "He is convinced the nation will need to import more gas because North American production is declining."
Yet, trouble and adversity is not new to Cheniere. According to the Times: "Cheniere was so unprofitable and utterly spurned by investors in 2002 that Mr. Souki had to borrow $30,000 from his company's president just to meet a payroll. But over the last four years, Mr. Souki has managed to arrange financing, sign up long-term buyers and master the regulatory process."
Meanwhile construction continues with two terminals already well under way " one in Freeport, Tex., which Cheniere partly owns," and a second one in Sabine Pass, Louisiana which Cheniere "owns outright."
As the Times reports "When completed, 6 huge storage tanks, 24 vaporizer modules and docking operations big enough to handle 400 cargo ships a year will help the Sabine Pass terminal process more gas than any existing terminal in the United States."
Contrast To Oil
An interesting part of this story is that companies focusing on natural gas seem to be acting completely different from their big oil counterparts, as "Even as prices of natural gas futures have fallen this summer to four-year lows, companies are spending up to $9 billion on building new terminals or upgrading old ones, with the nexus of activity decidedly along Texas and Louisiana shores."
Furthermore: "More than a dozen new liquefied natural gas terminal projects have been approved by the federal government in the last four years, all but one in the gulf region. Within a few years, there could be six terminals within 30 miles of the Sabine River alone. "
Indeed, projections are for LNG, which "represents only a 3 percent share of total American natural gas consumption" to become a key component of U.S. energy supplies as "Cambridge Energy Research Associates estimates that imported liquefied natural gas will account for 10 percent of American use by 2010, and potentially as much as 25 percent by 2020."
The LNG story is way off the radar screen, despite the coverage by the New York Times.
What strikes us about the story is the fact that Exxon Mobil and Sempra Energy are involved. Sempra is a natural gas distributor to California, where regulations make it nearly impossible to build an LNG terminal.
Exxon, like other U.S. based majors, is having trouble doing business around the world, and is facing the problem of decreasing reserves, due to both oil field depletion and hostile politics.
What the New York Times story does not tell, though, is that the Barnett Shale natural gas deposit, extending from the city of Fort Worth, Texas, is the largest on land natural gas deposit in the United States.
The Barnett Shale is a biologically active rock formation in which bacteria are producing natural gas as they feed on a decomposed coral reef that is hundreds of millions of years old, from when Texas was a shallow ocean.
The city of Forth Worth and the surrounding area are now natural gas boomtowns, as wells have popped up nearly everywhere.
Dallas Forth Worth International airport is believed to be sitting on a huge deposit, which is rumored to being studied and may be exploited at some point in the future.
A Google News search for Barnett Shale produced hundreds of articles and news releases of companies that are actively involved in exploiting the natural gas reservoir.
In other words, for those who are looking for reasons why the price of natural gas is collapsing, look to Forth Worth as the answer.
What this means for Cheniere in the future is hard to predict. Yet, for OPEC, Russia, and other oil producers, it's clear to see that the U.S. is steadily shifting toward another fossil fuel beyond oil, and that there are at least two interesting situations developing.
- Cheniere Signs 15-year LNG Supply Pact with Trader Trafigura (Jan 16)
- Cheniere Boosts LNG Tanker Fleet Amid Asian Demand Boom (Dec 05)
- Fourth Train Complete At Cheniere's Sabine Pass LNG Plant (Oct 13)