Companies are eager to export cheap US natural gas, but only Cheniere Energy has an Energy Department permit to do so. The Obama administration is likely to issue more permits.
The Department of Energy is required to give permits to export natural gas. A long legislative history in which gas was treated as a special commodity worthy of interstate regulation has left a strong regulatory mark.
Companies are pressing forward aggressively with exports of natural gas because there is a vast spread between domestic prices of gas and global prices.
The Federal Energy Regulatory Commission estimates that the December 2012 landed price (in million Btus throughout this article) for liquefied natural gas (LNG) will be $10.11 in the United Kingdom, $9.78 in Belgium (for the European market), $11.55 in India, $13.70 in China, and $14.10 in both South Korea and Japan. Meanwhile, the Henry Hub spot price (the US benchmark) is currently traded at $3.34 – the highest point for a year in which it traded below $2 for almost a month.
That spread between domestic prices and international prices is a clear arbitrage opportunity. For this to be a long-term benefit, however, there are still some hurdles that must be passed. It takes a significant investment of infrastructure and energy to export gas, unlike commodities such as oil. The process of liquefying gas and transporting it adds costs – estimates range between $4 and $6 per million Btus. This means that the $9 spread for exports to Asia makes sense, but the $7 spread for exports to Europe is a riskier bet.
In addition, as utilities scarred by long experience will tell you, natural gas is a notoriously volatile commodity, and long-term predictions have seldom held true. Nevertheless, most analysts now say that the shale gas revolution has ensured that the US now holds over a century worth of cheap natural gas.
The DOE is currently in a holding pattern on these export permits, awaiting the results of a study on what gas exports will do to the domestic natural gas market. Currently, only Cheniere Energy's (NYSEAMEX:LNG) application to export LNG from a terminal at Sabine Pass in Louisiana has been approved. There are about 15 total other permit applications outstanding.
Some stock analysts have said that Cheniere is a clear buy after Obama's election because his administration is now likely to slow or stop the process for issuing permits on exports of natural gas. As the sole current holder of a permit to export, the company would be in the driver's seat to earn outsized profits from exports.
But that view ignores the fact that this administration has been remarkably pro-gas since the very beginning of the shale gas boom. The State Department has been busy trying to promote fracking and horizontal drilling technology abroad, while the Department of Interior and the White House have taken credit for the shale boom.
In fact, the proposed federal regulations on fracking are a case of the government trying to protect the industry from itself. If a major environmental case turned against fracking, there is a possibility that new, heavy-handed regulation could kill the goose that is laying the golden eggs. In my view, this administration wants to protect the goose; the permits will be issued.
– This article is a modified version of a story in Energy Trends Insider, a free subscriber-only newsletter that identifies and analyzes financial trends in the energy sector. It's published by Consumer Energy Report.