The Emerging Natural Gas Crisis
"Was a great high wall there that tried to stop me? Was a great big sign there said private Property but on the back side it didn't say nothing. That side was made for you and me." -- Woody Guthrie 1912-1967, American Folksinger and Songwriter
According to the Dept of Energy they project that the demand for natural gas could reach up to 30Tcf per year between 2015to 2020; this represents an increase of 41% from the current 23Tcf consumed each year. The Energy information administration (EIA) estimates there are roughly 1,729 Trillion cubic of natural gas reserves in the United States. The national petroleum council estimates that only 1,451 trillion cubic feet are recoverable. At the current rate of consumption and assuming we are able to tap all the available reserves of natural gas, we have roughly a 75 year supply of this precious commodity. However if we use the 2015-2020 consumption figures then it drops down to 57 years and that's assuming we are able to tap the entire 1,729 with using the higher reserve figures from the EIA and not the lower figure issued by the national petroleum council.
It's extremely unlikely that we will be in a position to tap all the reserves due to the following problems:
- Some of these supplies are on federally protected land and its very hard or next to impossible to get permission to drill on these lands.
- Environmental groups will object to drilling in certain locations and thus could significantly delay or prevent drilling completely.
- Transportation facilities. This is probably the biggest factor in determining new drilling sites. First of all it's not easy to transport natural gas as is the case with oil. If there is no existing network of pipelines then drilling does not makes sense as natural gas cannot be transported easily and the building of new pipelines might make the endeavor economically unfeasible at that point in time.
Gas production has already peaked in the US and it appears to have peaked in Canada too. Some experts claim that production in Alberta peaked in 2001 when it produced 5.1 Tcf; Alberta is the largest exporter of natural gas to the huge US market. To make maters worse as oil production is ramped up in the Tar sand regions of Canada larger amount of natural gas will be consumed locally. The extraction process consumes huge amounts of natural gas.
The situation appears to be so bad that the old Fed Head Alan Greenspan testified twice before the congressional committee on this issue. In June 2003 he made the following statement in front of them "Yesterday the price of gas for delivery in July closed at $6.31 per million British thermal units (Btu). That contract sold for as low as $2.55 in July 2000 and for $3.65 a year ago." He was trying to illustrate that demand had increased so much and supplies were extremely tight; hence the market was ripe for an extreme move. It appears that so far they have paid very little attention to him. Perhaps when this contract trades in the 9.00-11 dollar ranges they might start to pay attention.
In 1973 pertoleum and gas fired plants produced 17% and 18% of the electricity while nuclear power plants produced 3%. Today petrolem plants produce less then 3%, nuclear power plants 20% and gas powered plants are still producing 18%. However the output has more then doubled since 1973 hence we are using a lot more natural gas now then we were in 1973. Since the 1990's natrual gas was being pumped as the solution to our problems, not only was it cleaner buring but supposedly there was no supply problem in sight. Almost all the power plants buidl in the 90's were gas fired and almost all new houses built today come with natural gas furnaces. Business and consumers fully embraced natural gas as they bought the hype that was being put out by the so called nutty experts. According to the American gas association 55% of American homes use natural gas for heating or cooking. Now they are starting to realize all is not well and in a few years they will find out just how bad things really are.
The world has huge reserves of natural gas but the problem is transporting these readily avaialbe resounces. Bill O'Grady an energy analyst from A.G. Edwards sums up this situation rather well. "There's lots of natural gas in the world, but there are no pipelines running from Kazakhstan to Los Angeles."
Then there is a lot of noise about LNG (liquid natural gas) being the solution to our problems. LNG facilities are extremely expensive and very attractive targets for terrorits. LNG facilities not only cost a fortune but also take years to build; hence there is a huge lag period between implementation and production.
According to the Gas technology institute (GTI) it now costs roughly 155 million dollars to build a LNG tanker. The regassification termial cost on average one billion dollars but it can be as low as 100 million and as high as 2 billion depending on location. The biggest cost is the actual liquefaction plant, prices range from 1.5 billion to 2 billion dollars. Hence to get this operation rolling you need a liquefaction plant, LNG tankers and then a regassiication plant. The cost of this operation runs in the billions of dollars and it's not something that can be implmented immediately; such facilities take years to build. Thus even if the US fully embraced this concept seveal years would have to elapse before they started to pay off.
Then there are severe dangers associated with LNG tankers;
1) First of they are massive; the size of 3 football fields and ones forward view is extremely limited. In fact these tankers are so huge that ones forward view for ¾ of a mile is blocked. This means that you cannot clearly see if the caost is clear; a potentially dangerous situation in our opinion.
2) They are 12 stories high, have a top speed of roughly 20 knotts and it takes 5 miles to bring these ships to a halt. If terrorists ever had to get hold of one of these the damage they could cause would be totally unimaginable.
3) They carry approximately 20 billion gallons of natural gas which contains the energy of roughly 55 Hiroshima bombs. To put this into perspective in the 1944 LNG disaster one square mile of Cleveland was incinerated; todays LNG tankers contain 20 times more energy then this.
We think several of the above reasons will serve to limit the growth of LNG facilities in the US. Even if they don't it's going to take years to build them so they will not be able to provide any sort of relief for the next several years; by that time natural gas could be trading as high as 21 dollars.
Let's take a look at what the charts are saying.
This is a 2 year chart of the continuous contract. One can see after soaring to a high of 15 dollars it has experienced a rapid and brutal correction. This move down was exacerbated by the fact that so many hedge funds had taken out huge long positions on the futures markets; when the market turned their haste to bail out created a melt down. Amaranth Advisors alone lost 6.5 billion dollars on this trade and will be going belly up soon Full Story. As they say one man's disaster is another's opportunity. The technical picture looks extremely good given the fact that demand is simply going to skyrocket in the years to come. AT Tactical Investor we refer to such occurrences as an intra market positive divergence signal. As with all sectors some stocks will do very well and some will not budge. However If you spend time doing a little footwork you should be able to position yourself in the right stocks. If you don't have the time then you can join us and let us do the work for you. We have identified several interesting stocks in this sector.
The old main up trend line (black) has now become a zone of resistance and note the last 3 break out attempts failed. One positive is that the main down trend line has been penetrated to the upside and so it appears that a new trend is in the process of emerging. Since natural gas has taken off so fast in such a relatively short period of time we expect it to pull back a bit before taking off again.
Unlike oil there are huge supplies of natural gas all over the world; the problem however is getting those supplies to the right markets. In that sense the situation in natural gas could be described as being worse then the current oil situation. At least if a new huge well of oil is found, transporting those supplies from A to B is a very simple process; the same cannot be said of Natural gas. This is one of the reasons there has been a huge push for nuclear energy and eventually we believe there will be a push for coal which we refer to as the other black gold.
"Procrastination is the grave in which opportunity is buried." -- Source Unknown