Monday, August 6, 2012
"I've been in the LNG market for more than 20 years and I've never seen the market change this rapidly or this strongly."
This comment was made by Sveinung Stohle. He's the CEO of Norway's Hoegh LNG, one of the world's oldest liquefied natural gas (LNG) shipping companies.
LNG is natural gas cooled so it can be shipped overseas. Hoegh provides LNG tankers, crews, and technical services for companies looking to ship natural gas around the world. And demand is booming right now.
Stohle's view on the industry has been echoed by other LNG shipping providers like Golar LNG (GLNG) and Gaslog Limited (GLOG). In fact, the cost to rent an LNG tanker right now is over $145,000 per day. That's near a record high – and more than 50% higher compared to last year.
Growth Stock Wire readers should be familiar with this trend. Back in January, I talked about why LNG prices would surge.
Dayrates had already gotten a huge boost early last year, when a major earthquake and tsunami caused a meltdown at Japan's Fukushima Daiichi nuclear power plant. Japan shut down most of its nuclear capacity after the disaster. In order to maintain electricity output, the country replaced nuclear energy with natural gas. And it became the world's largest LNG importer.
Some analysts believe LNG dayrates have peaked. Japan's nuclear capacity will eventually come back online, reducing the need for natural gas.
Also, China is one of the largest LNG importers. And it's beginning to explore for natural gas on its home turf. If China has half the success the U.S. has had, imports will slow significantly – resulting in much lower LNG prices.
Finally, the U.S. is expected to open its first LNG exporting terminal in 2015. The U.S. is the largest natural gas producer in the world – with enough supply to fuel our needs for 90 years. Exporting natural gas to Asia – where prices are three times higher – would reduce supply and lead to much higher gas prices.
While these are risks, I believe LNG prices will stay elevated for a least a few more years. That's great news for LNG shippers.
Starting with Japan... It's nearly 18 months later and the Fukushima Daiichi nuclear plant is still not stable. Radioactive water was recently leaking from one of its pipes. And while one of three nuclear reactors has restarted, the area around the Fukushima plant is still considered a health hazard.
With most of the Japanese public against nuclear energy, it could take many years before the country builds up its capacity to anywhere near pre-tsunami levels.
As for China... The Energy Information Agency (EIA) says China is sitting on the world's largest deposits of natural gas. Once this gas comes online, China's imports would slow considerably. However, several headwinds could prevent China from producing meaningful amounts of natural gas anytime soon.
You see, you need massive amounts of water for fracking and horizontal drilling. These are the two technologies that have allowed U.S. companies to produce huge amounts of natural gas. Just one horizontal deep-shale well uses an average of 5 million gallons of water.
China has a major water problem. Its total water resource continues to drop year after year. In 2012, the country's largest freshwater lake located in Poyang (Southeast China) completely dried up. Also, China's shale deposits are much deeper compared to the U.S. This will make drilling much more expensive for a country that has little experience using advanced drilling technology.
In the U.S., Cheniere Energy is about to become the first company to build a terminal to export natural gas. Management says it will be operational by 2015 with an estimated cost of $5 billion. In all my years as a research analyst, I've never seen a project this big be developed on time – or on budget.
Plus, there are political hurdles. Exporting natural gas makes perfect sense with prices in the U.S. much cheaper than the rest of the world. However, chemical companies are lobbying hard against the project. Natural gas is a major cost for the industry. And they don't want to see rising natural gas prices. Environmental groups are also dead-set against exporting natural gas.
In short, I see no threat to LNG dayrates to fall anytime soon. Natural gas demand from Asia will continue for many years to come. And I don't see the U.S. exporting our huge supply of the clean fuel within four years.
If I'm right, most LNG shippers should see windfall profits over this time frame.
It's just a matter of time before we see widespread adoption of natural gas as a transportation fuel. Right now, it's still early… and you have the chance to profit from one of the biggest energy megatrends in more than a decade. Learn more about it here.
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