Stock market watchers hint at natural gas bubble
eyeforenergy.com
HOUSTON, Texas (February 20, 2004) – Investment mania around natural gas has reached such a fever pitch in the United States that observers have begun to describe it with a chilling word last applied to the Internet boom: bubble.
The Internet bubble burst in 2000, sending the stock market into a three-year tailspin that has only recently corrected itself. Market observers are now openly musing on the possibility that natural gas will be the next speculative investment to pop.
“Gas balloon?” was the title Barron’s assigned to a February 9 article by Spencer Jakab on the speculative momentum that has built up behind natural gas and, especially, behind liquefied natural gas (LNG). The article reported that shares of large-cap natural gas producers including Devon Energy and Burlington Resources are up more than 100% over the past four years, with small caps climbing by 500%, on average. The run-ups in the stocks of LNG terminal developers have been even more eye-popping: Shares of Cheniere Energy, for example, are up 1,100% in just the past year.
High prices generate high interest
The excitement centers on natural gas prices that are hovering around $5 per million British Thermal Units and dire predictions of growing U.S. natural gas shortages that will peak in the next decade. Because domestic production of natural gas is declining, the popular wisdom is that the U.S. will need to import larger and larger shares of its natural gas supplies from countries where production is increasing – places as close as Trinidad & Tobago in the Caribbean and as distant as Nigeria and Australia. Currently, the only feasible way to move natural gas such long distances is in liquid form, which requires massive infrastructure investments to liquefy, ship and re-gasify the precious fuel.
The U.S. currently has just four terminals capable of receiving LNG shipments. That must change if LNG is to become a substantial portion of the U.S. supply mix, so announcements of new terminal projects have skyrocketed. Enercast.com put the number of pending projects at 40 two weeks ago. Since then, IIR Industry Alerts (www.industrialinfo.com) has posted announcements of three more LNG terminals – one on the Gulf Coast of Texas, one on the U.S. West Coast and one on Vancouver Island in Canada. Experts anticipate that fewer than a dozen of the projects – perhaps half those – will actually be built.
The U.S. Energy Department projects, however, that LNG imports will grow from the 229 billion cubic feet received in 2002 to 900 billion cubic feet by 2005. Even if imports do triple, however, LNG will still account for just 4% of U.S. natural gas demand.
Opposition, competition raise question marks
Experts doubt all of the proposed LNG terminals will come to fruition because of two wild cards. The first is public opposition to the siting of LNG facilities and the resulting difficulty in securing the needed permits, especially in the wake of last month’s Algerian LNG plant explosion that killed 27. The second is the growing possibility that a pipeline will be built to move massive but untapped natural gas reserves from Alaska’s North Slope to the lower 48 states. If that pipeline becomes a reality, the economics of LNG in the U.S. could change dramatically, lowering demand for the imported fuel and reducing prices.
Other variables include how much federal land in the Rocky Mountains will be opened to gas drilling, which could further ease supplies and drive down prices, and whether producers in the Gulf of Mexico will use new technology to aggressively drill for gas buried deep in the shelf under relatively shallow water, as a few have begun to do.
Proposals to build a pipeline to move natural gas from Alaska’s North Shore have been talked about since the 1970s, but low prices for the fuel discouraged the major oil companies from pursuing the project – oil was a far more lucrative commodity.
But now that natural gas prices have soared and growing shortages loom, the economics are more attractive.
Buffett turns up the heat on big oil
The race to build a pipeline shifted to high gear last month when MidAmerican Energy Holdings, 80% owned by Warren Buffett’s Berkshire Hathaway Holdings, proposed building a $6.3 billion, 745-mile pipeline from the North Slope of Alaska to an intersection with a proposed Canadian pipeline. The Alaska pipeline would be in operation, the company projects, by 2010.
Two days later, Alaska Governor Frank Murkowski said the state also had received a pipeline proposal from Exxon Mobil, ConocoPhillips and BP. The three companies, which have been sitting on their massive Alaska natural gas reserves for years, propose spending $20 billion to construct a 3,500-mile pipeline from the North Slope to the U.S. Midwest, with a projected opening date of 2014. All three companies also are aggressively pursuing LNG projects, which they believe can come on line faster and deliver a higher return than a pipeline, especially in the near term when shortages are expected to be the greatest and prices the highest.
Buffett’s proposal, however, would cost a third of what the oil companies are proposing to spend and be ready four years faster. “It’s kind of kicked the producers in the backside,” David Parker, CEO of the American Gas Association, told The Wall Street Journal.
According to the financial newspaper, the oil companies’ pipeline would be the largest single construction project in history. Not surprisingly, therefore, the oil companies say it will only be feasible if they get the $18 billion in loan guarantees, accelerated depreciation and $400 million tax credit currently included in the Energy Bill pending before Congress, plus something the bill doesn’t currently include – a subsidy to guarantee producers a minimum price of at least $3.50 for their gas.
So could an Alaska pipeline knock the pins out from under the building LNG boom? At least one analyst doesn’t think so. Andy Weissman, Chairman of Energy Ventures Group, a hedge fund, said that both a pipeline and a flood of investment in LNG still won’t be enough to completely close the projected supply/demand gap in North America. He thinks both options offer good opportunities for their backers to profit from the sudden surge of interest in natural gas. |
