Thursday, December 26, 2019

"Is LNG Actually The Future Of Energy?"

This stuff is not new to our readers but it is nice to have the key points in one place.
As to the investment side of things, we sure haven't been pitching the long side,except for tiny little tactical trades, not with our mantra being "There's a lot of gas around", granted not great rhetoric but a fact, Jack.

The reason for our interest is threefold: first off, this is a major, major change in the sourcing and transport of terajoules of energy.
And the reason that is important, at the most basic level, is that life is easier if you get on the right side of the big trends.

Second. and a corollary of the first, when making money is your goal, parking yourself next to a waterfall of money is a more lucrative position than trying to dowse and divine your way to riches.

Third, although this isn't a political blog, politics is everywhere people are, and our best example is still the effect of the repeal of the Corn Laws on the fortunes of a Virginia mountain family who relocated to Chicago.
(what? you don't remember Peel and Repeal!? see below)

The low-sulfur fuel mandate from the International Maritime Organization was only the first step.

From OilPrice, December 22:
Drillers and investors who are getting pummeled in the threadbare LNG market might not be sold anymore on the idea that natural gas is the fuel of the future, but it’s not only the future: It’s the key to every major global energy strategy in the world right now.
It’s the key to dominion, and there’s every reason to be patient.
Patience is hard when gas prices have tumbled to multi-year lows.

Gas futures NGc1 prices have dropped to $2.29 per million British thermal units (mmBtu) at the time of this writing, down more than 40% over the past 12 months and the lowest level since May 2016.
A big part of the blame can be pinned on a supply glut coupled with not nearly enough pipeline capacity to transport the commodity.

Gas prices have even turned negative for some Permian Shale drillers
Gas prices at the Waha Hub in West Texas have remained severely depressed, touching a record low of negative $9/mmBtu in April; in essence meaning some drillers are paying other producers to take their gas.

This rather quirky situation happens because drillers who failed to commit to shipments in advance are only allowed to flare their gas for a certain amount of time--up to 6 months in Texas--when faced with low prices after which they must pay other drillers with pipeline space to take it.
Oil and gas output in the Permian has doubled over the past three years making it tough for pipeline infrastructure to keep up despite concerted efforts to add new capacity.
Source: Macrotrends
Yet, against this rather depressing backdrop, to be narrowly rational and overly focused on the short-term outlook could mean leaving big money on the table.
Gas demand continues to grow at a torrid pace (4.9% in 2018, the highest clip since 2010), while big-time infrastructure spending continues to flow into the industry (~$360 billion in 2018)--low gas prices be damned.
Indeed, some industry experts have nailed their colors to their masts with bullish long-term projections for the natural gas industry. The International Gas Union (IGU) has presented yet another strongly bullish yet compelling forecast for the industry.

The bottom line in the bullish theory is that LNG is the kingmaker when it comes to energy strategies.
As far as two decades out, this is the key to energy dominion, if not immense geopolitical power.

Cost Competitiveness 
The biggest reason why gas is likely to remain the cornerstone of our green economy is, ironically, the same reason why many investors are fleeing for the hills--low gas prices.
Gas prices have become very competitive vis-a-vis other energy sources. While low spot prices at key hubs due to LNG surplus continue to hog the limelight, the media is missing the big picture here: Deep structural changes including new technology in the upstream market continue to lower breakeven costs, making it economical for drillers to continue production at prices that would have put them out of business just five years ago.

Nearly 70% of the world’s proven gas reserves are fields with an average breakeven price of less than $3/MMBtu. In the midstream section of the market, LNG prices have dropped by an average of 20% over the past two decades while growth of carbon pricing is helping close the gap between natural gas and coal....

The Corn Laws story, it was in all the papers:

Over there, on the left, the Political Economist column.
Remember the date May, 1846.

Back in 2007 we posted some articles on investing based on politics, using McCormick's reaper as an example.
Although the reaper had been commercially available in 1840 sales didn't really get going until England repealed the Corn Laws. Here's a snip from "Global Warming, Politics, Laws and Opportunity":
...Invented in 1831 and patented in 1834, McCormick didn't sell a single machine until 1840. The sales figures for the early years are debatable but these are the best I could put together:
1840------- 2
1843------ 29
1844------ 50
1845------ 58
1846------ 75

External factors played a part: Florida, Texas and Iowa were admitted to the Union in '45, '45 and '46 respectively.

Miles of railroad trackage, 2818 miles in 1840 increased to 4633 in 1845 and 9021 in 1850.
The nation's asset base grew e.g. life insurance in force went from $4.7mm (face) in 1840 to $97.1mm in 1850. The country was growing pretty fast....
This led to a look at the early years of The Economist, founded in September 1843 to advance repeal of the Corn Laws.
From "Global Warming, Politics, Laws and Opportunity--Part II":
To summarize part I (below) the McCormick family invented the reaper, sales in the first nine years were zero and in the next seven averaged 31 per year. They then exploded to 800 machines in 1847. What happened?

As reported by The Economist May 16, 1846, the British House of Commons had repealed the "Corn Laws", eliminating the tariff on imported wheat, the day before. Corn in this usage is not maize but rather is generic for grain. Prime Minister Peel won the battle but lost his premiership, the quote of the day was "Peel and repeal."...
The elimination of the tariff combined [so to speak -ed] with the mechanical harvester led to a huge increase in American grain exports to England and a dramatic lowering of unit costs, the two factors, greater volume and lower input costs began a 165 year decline in real food prices.