Matt Insley

There’s been a lot of ways to play the rebirth of American energy.

The U.S. oil and gas patch has been booming – pipeline players, drillers, processing facilities and operators are just a few of the ways we’ve suggested to play it.

Today I want to share one American investment that you’ll want to avoid.

It’s hard not to get caught up in the euphoria.

Oil is flowing from South Texas to North Dakota – and America’s total crude production is heading higher by the day. Same goes for natural gas. Today we’re producing more of the stuff than we’ve ever produced.

But the same excitement that leads you and me to the next energy opportunity is also leading a lot of talking heads (and investors) to jump on the bandwagon of one budding industry.

I’m talking about U.S. liquefied natural gas (LNG) exports.

Today I want to give you my quick take on why this industry is doomed – and companies that are plunking down billions of dollars, like the one I’ll share below, are set to lose.

You likely know the backdrop. The U.S. is producing more oil and gas than we could have dreamed just a decade ago. And with more of this abundant energy filling U.S. pipelines and storage facilities it’s only natural for the talking heads to start yapping about exports.

The problem is, when you talk about exports (natural gas in this case) you have to talk about very long-term trends. You can’t just take today’s information and extrapolate it out for the next 20 years. In fact, that’s a losers game that the LNG industry has already faced!

Back in 2005 the outlook for U.S. natural gas was bleak. After production peaked in 1973 at 22.5 trillion cubic feet (Tcf), production had slowly declined to less than 19Tcf by 2005. The long-term forecast didn’t look good.

That’s when the idea of importing LNG started to gain traction. Lots of money went into building import terminals — one of which was the Sabine Pass facility in Louisiana, owned by Cheniere Energy (LNG: NYSE.)

Back then the forecast indeed looked like we’d need to import natural gas. Heck, with a 30-year decline of production I guess you can’t fault the planners.

Flash forward to today, with U.S. natural gas production over 24Tcf (the highest on record), and you’ll see that the import facility idea was a bust. Cheniere’s share price at one point in 2006 was north of $40 and as recently as 2010 shares traded in the $2 range. Had you bet on U.S. LNG imports you lost.

But get this…

Today Cheniere’s share price has crept back up to the $20 range on hopes of turning the import facility into an export facility with a multi-billion dollar facelift.

Buyer beware. There’s mounting reason to believe that this plan is your typical “throwing bad money after good”…or, in this case “throwing bad money after bad money.” Let’s count the ways…

For starters, this project comes in the midst of the shale gas boom, which at one point last year pummeled the price of natural gas to a multi-year low at $1.92 per MMBTU.

But I’ll be the first to tell you that natural gas isn’t going to be that low for any extended period of time. Just look at the price action last year and you’ll see that almost instantly after prices dropped to $2, they quickly recovered to the $3 range. Today prices sit around $3.50, but with more chemical plants, power plants and processing facilities gearing up, prices could head slightly higher.

Also, getting back to the idea that you need a long-term outlook for these multi-billion dollar facilities, it’s still up in the air whether shale gas is sustainably produced below $5-6. If it turns out that your typical shale gas well needs $6 to breakeven, all of a sudden the margins start getting a lot tighter for Cheniere’s export facility.

But that’s not the worst part. Get this…

“Despite all the attention surrounding the shale gas revolution, in volume terms the bigger story is the expansion of mostly conventional production” BP states in its recent Energy Outlook 2030. It goes on to say this: “The Middle East is the largest contributor with 31 Bcf/d, followed by Africa (15 Bcf/d) and Russia (11 Bcf/d)”

So you see, while the shale boom is big news for the U.S., our economy and our energy security, it’s not a good bet in the world market. And remember, the stats above are GROWTH from current production to 2030. So putting it in perspective, currently the U.S. produces a little over 24Tcf, and the Middle East, Africa and Russia, combined will produce an ADDED 57Tcf over the next 17 years.

Just to put a fine point on it, here are some further forecasts from BP:

On a regional level, Africa is set to overtake the Middle East to become the largest net LNG exporter in 2028. Australia, with a wave of large projects coming on stream from 2014, expands LNG supply by 15 Bcf/d, overtaking Qatar as the largest LNG supplier by 2018 and accounting for 25% of global LNG production by 2030.

There are plenty of big names in the LNG market, but the U.S. isn’t one of them.

It all comes down to who gets the cheaper gas. And there’s no way that unconventional shale gas is cheaper to produce than conventional gas out of the Middle East, Africa, Russia or even Australia.

Mark my words, Cheniere’s export plant is going to be a marginal facility. That is, sure it may start exporting LNG in the next couple of years. But as conventional natural gas resources come online in places like Africa, Qatar, the rest of the Middle East, and Australia the numbers aren’t going to favor U.S. exports. So while LNG exports may work for the short-term the long-term outlook is marginal at best.

Heck, just looking at Cheniere’s info page on their Sabine Pass facility, they still tout it as the “largest receiving terminal, by regasification capacity, in the world.” Ha!

They bet billions of dollars on this world-class import facility. And they bet wrong. They haven’t even taken the language off their website – shameful!

Today they are taking the existing infrastructure and reversing their bet. Indeed, this may go down as one of the most short-sighted mistakes in history. It’s like a gambler at a roulette table. After losing big, betting black, the gambler makes a last minute move and swings his chips to bet on red.

What’s worse, investors are flocking to the idea.

With all of the other positive energy stories here in the U.S. I urge you NOT to plunk down your money on this turnaround player.

As T. Boone Pickens said in an interview last year, we’d be the “dumbest” people in town if we export clean natural gas instead of using it here at home. I agree with T. Boone., The fundamental argument to keep natural gas within our borders is clear.

Likewise, on a basic economic argument, the export scenario doesn’t stack up. That is, in the long-run I don’t see an economic winner in U.S. natural gas exports.

Five to ten years from now we’ll know. But by then it’ll be clear, those betting on Cheniere will be the dumbest people in town.

Keep your boots muddy,

Matt Insley

Original article posted on Daily Resource Hunter 

Matt Insley

The Managing Editor of the Daily Resource Hunter, Matt is the Agora Financial in-house specialist on commodities and natural resources.  He holds a degree from the University of Maryland with a double major in Business and Environmental Economics.  Although always familiar with the financial markets, his main area of expertise stems from his background in the Agricultural and Natural Resources (AGNR) department.  Over the past years he's stayed well ahead of the curve with forward thinking ideas in both resource stocks and hard commodities. Insley's commentary has been featured by MarketWatch.

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