Burning Off the Cheapest Energy in the World

“We have the cheapest energy in the world,” says the prolific oilman, T. Boone Pickens.

In a recent interview on Bloomberg’s Street Smart, Pickens weighed-in on the game-changing power of America’s energy boom.

“When I got out of school in ’51, the [oil and gas] industry was on its ass,” he said. “Now, it’s the most dynamic industry in the United States”

Today we’ll take a look at some of the latest ways to play America’s dynamic energy industry, with a special focus on natural gas…

According to the U.S. Department of Energy, for the latest month on record, the U.S. produced approximately 2.19 trillion cubic feet of natural gas. That represents the HIGHEST monthly production of natural gas in our country’s history.

This may spur savvy readers to ask: “But Matt, there’s a shale boom going on, isn’t it obvious that the U.S. should be producing more natural gas than ever?”

Simply stated America’s cheap natural gas is going to keep providing arbitrage opportunities until prices come closer to global equilibrium.

Actually, no.

Simple economics would lead you to believe that with natural gas prices towards the lower end of the price spectrum (sub-$4) there’s not much incentive for natural gas producers to go gung-ho into production. A quick glimpse into the future, via Nymex futures contracts, and you’ll see prices don’t hit $5/mmbtu until January of 2020! So there’s not much future incentive to drill for gas at today’s prices either!

Coinciding with that logic, a quick look at the Baker Hughes rig count reveals that over the past 5 years there was a massive swing away from natural gas drilling. Cheap gas and high oil has created a huge swing towards oil production and away from natural gas.

Heck, gas is so cheap and infrastructure is so limited in North Dakota’s Bakken that much of the byproduct gas that’s produced during oil operations is actually burned off at the wellhead in a process called “flaring.”

Add it all up and without really trying, the U.S. is producing more natural gas than ever.

All said, when it comes to America’s natural gas boom, baby you ain’t seen nuthin yet!

Of course, we have seen quite a bit of early-inning action…

First off, a quick look at your electricity bill and you’ll see that the trickledown effect of cheap natural gas is hitting your own bottom line. Depending on what fuel you use to heat your home your gas and electric bill could be off as much as 25-30%. Even my dog is raising his eyebrow at the thermostat… he probably thinks his owner got a raise at work and I can finally heat the house properly. Not so, furry buddy! It’s all part of America’s gas boom!

The wave of cheap gas has hit the bottom line of many publically traded companies, too.

Chemical players like Dow Chemical or LyondellBassell are using cheap natural gas to their advantage — year over year the companies are up 32% and 40% respectively. With cheap feedstock and a global chemical market, profits are up. Nothing to sniff at there!

Likewise, natural gas export facilities are racing through the Department of Energy’s approval process to ship raw natural gas overseas. Natural gas prices in Asia, as you may know from some of Byron King’s recent coverage, can command more than a threefold premium to our domestic price. In that realm, companies like Cheniere Energy and Dominion Power have seen a nice run-up of late – year over year Cheniere is up 142% and Dominion sports a 23% gain.

Heck, even the mainstream refiners are clinging to a year over year gain – with the use of natural gas as a feedstock/blendstock, petroleum products are again a profitable business. Mainstream refiners, Valero and Tesoro, are up 37% and 24% year over year, respectively.

Simply stated America’s cheap natural gas is going to keep providing arbitrage opportunities – for investors and savvy companies alike — until prices come closer to global equilibrium.

So what’s next on the list of opportunities?

One major idea that we haven’t covered in depth is natural gas to liquid (GTL) technology.

“Gas to liquids” is quite literally just that. Here’s a how it works…

Dry natural gas that comes from a wellhead goes through a process called gasification. During this stage natural gas is mixed with hydrogen and carbon monoxide – this process creates a product called synthesis gas or syngas.

The syngas then goes through another reactor — usually a Fischer Tropsch process — where the syngas is converted to long-chained hydrocarbons, with water as a byproduct.

From there, the long-chained hydrocarbons are sent to a cracker that creates shorter-chained hydrocarbons – including naphtha, kerosene, parafins and other oils.

Long story short, you can start with dry natural gas and end up with a liquid product that’s much easier to transport and sell.

Business is booming, too.

US Gas Plant Production of Natural Gas Liquids and Liquid Refinery Gases

As you’d expect with an increase in cheap natural gas, the GTL sector has been booming. Looking at the chart above, US gas plant production of GTLs recently spiked to a high of 79 million barrels per month – over 2.5 million barrels per day. That’s a lot of NGLs!

Best of all, we could be at the start of a longer-term opportunity, here.

Remember, GTL only works if natural gas is cheap relative to oil. The way that I see it, even with other sources of demand for natural gas – LNG exports, power plant switchovers, vehicle use, etc – we’re still set to have relatively cheap gas compared to oil.

According to a slightly-dusty, but still pertinent, article in the Oil & Gas Journal, “North American natural gas supply fundamentals have been permanently altered with the widespread development of unconventional gas reserves that use technologies developed to exploit shale plays.”

Indeed, GTL is a prime contender to bite into the arbitrage opportunity that America’s cheap gas presents. And reiterating what I said above, this opportunity is going to exist until gas prices rise.

The big players in the GTL market are a regular cast of characters, too. Tomorrow we’ll cover them along with more on this topic. Stay tuned!

Keep your boots muddy,

Matt Insley
for The Daily Reckoning

Ed. Note: In yesterday’s issue of The Daily Resource Hunter, Matt relayed an important message from a former energy insider – a Harvard-educated geologist who’s discovered the most exciting breakthrough in the natural gas market. It’s not a secret, but you have to know where to look. And if you’re a Daily Resource Hunter reader, you had a chance to find out for yourself yesterday. If you’re not, we suggest you sign up for FREE, right here, so that you never miss another incredible investment opportunity.

Original article posted on Daily Resource Hunter