Editor’s note: For more updated information from Keith Kohl on Shale Gas Stocks, click here…
It isn’t often that you’ll find me disheartened toward an oil or natural gas investment.
In fact, the last time I cautioned my readers to be on guard was back in June. At the time, oil just surpassed $141 per barrel. One of my readers asked me how I felt about the Colorado oil shales.
Earlier this morning, I had a similar experience. The subject wasn’t about oil, but rather natural gas. As you know, I’ve been on an unconventional kick lately when it comes to natural gas. But it wasn’t the Haynesville or Marcellus shales that my reader was inquiring about.
The question was about the role that liquefied natural gas (LNG) will play for the U.S. My reader had been given an “extraordinary opportunity” to invest in this growing trend.
Unfortunately, the only opportunity it offered was a sinkhole for his hard earned money.
Before I get ahead of myself, let’s look at the situation.
The Liquefied Natural Gas Investment Trap
I realize that some of my newer readers may not have had the time to look into LNG at any great detail, so I’ll run through the basics…
LNG is simply natural gas that has been cooled to -2650 F. At that temperature, natural gas can be stored as a liquid. The LNG (which is much smaller in volume than in gas form) is exported through LNG terminals via tanker.
Why is that such a big deal?
Natural gas is typically shipped through pipelines. This is why natural gas markets are regional. LNG brings natural gas to a global market since it isn’t confined to pipelines.
Over the last 20 years, LNG imports to the U.S. have grown significantly. This was the argument made to my reader. They pointed out that LNG imports between 2002 and 2007 jumped more than 200%, citing EIA LNG import data.
Even I’ll admit that the LNG growth trend during that five-year period is impressive.
More good news for LNG came out recently. A few months ago, BP stopped work on their LNG terminal project. Last week, the company requested an extension for construction. The terminal is on the eastern shore of the Delaware River. Remember, these projects are extremely expensive. The BP project on the Delaware River is expected to cost approximately $700 million.
Looks can be deceiving, though.
First I’ll address the imports, U.S. imports of LNG reached a record high of 770,812 million cubic feet in 2007. During the first nine months of 2008, imports have been drastically cut. I suggest taking a look at the numbers for yourself. According to the numbers from the Energy Information Administration, the U.S. is importing less LNG than it did in 2003. So much for a growing trend.
Granted, U.S. imports of natural gas are lower across the board. Imports from both LNG and pipeline have fallen this year. Of course, there’s a very specific reason for this, but I’ll get to that in just a second.
Any excitement over BP’s terminal is short-lived. The terminal’s completion date has been pushed back from 2009 to October, 2013. Things might change over the next seven years, but it’s unlikely.
Is there a chance I’ll revisit the idea of investing in LNG?
Perhaps.
Until I see better evidence that LNG will play a more substantial part in natural gas markets, I’m staying out of this trap. I keep seeing project after project being either delayed or abandoned altogether. I need to see much more investment in the infrastructure before I think about putting LNG into my portfolio.
At this stage in the game there are simply better opportunities for investors elsewhere.
Looking Beyond LNG
I just mentioned there’s a reason for lower U.S. natural gas imports. Domestic production, particularly in unconventional basins, has been on the move. U.S. production is expected to grow by nearly 7% this year, and estimated to grow over 4% in 2009. Not surprising, the majority of growth are due to the huge investments made in shale gas, coalbed methane and tight sandstone formations.
Despite the boom in production, today’s market is still rough. Let’s face it, oil isn’t $141 per barrel anymore. Now that natural gas is trading below $7 Mcf, many companies are scaling back their projects. But as I’ve said countless times before, “Crisis breeds opportunity.”
This market is no different.
If you had told me earlier this year that I could pick up shares of Carrizo Oil and Gas (NasdaqGS: CRZO) under $20, I would have jumped in without question. Carrizo has a solid position in several prospective shale basins, including approximately 85,000 acres in the Barnett play. Carrizo also has more than 77,000 acres in the Marcellus shale. Most of those acres are on five-year leases.
Looking Forward…
Within the next few days, my Energy and Capital readers will see for themselves how our economic situation has gotten this bad. More importantly, you’ll find out who’s to blame for the crisis at hand.
One thing is for certain is this volatile market, however. You don’t need to sit idle, praying your portfolio can pull through this recession. Securing your own double-digit gains is only the first step to protecting your wealth.
Stay tuned.
Until next time,
Keith Kohl
