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LNG Exports Won’t Save Natural Gas’ Slide

Commodities / Natural Gas Jan 24, 2012 - 04:01 AM GMT

By: G_Joel_Chury

Commodities

As the price of natural gas continued its free fall through last week, resulting in lows not seen since 2002, it’s no surprise that the price environment has chipped away at the big producers. Chesapeake Energy (NYSE:CHK) tipped its hand today, stating that it would pull back on its drilling activity by half and reduce production by 8% on account of low natural gas prices.


As the price of natural gas continued its free fall through last week, resulting in lows not seen since 2002, it’s no surprise that the price environment has chipped away at the big producers. Chesapeake Energy (NYSE:CHK) tipped its hand today, stating that it would pull back on its drilling activity by half and reduce production by 8% on account of low natural gas prices.

Normally, this kind of white flag waving would result in a punishment from a market that hates the word “reduction,” but the response this morning has been overall positive. As if to breath a sigh of relief, the market seems to be rewarding Chesapeake for its self-realization and the pull back, resulting in a 5% bump as of publication.

Couple this announcement with a warning from Exxon Mobil (NYSE:XOM) that it would cut spending on drilling gas wells, and the message is getting clearer: Even the biggest players can’t keep up with these economics.

Though the announcement of a slightly reduced supply of natural gas gave the commodity a small boost this morning, there is still a long road ahead for gas prices to return to an economic level. Long gone are the days of the 80s and 90s where profit could be made from $0.85/mcf and parties were had over $1.50/mcf. Today, with the effective, but expensive, process of horizontal drilling plus multi-stage fracturing has skewed the economics of natural gas in North America, for what seems like forever.

But, some feel that there’s a savior on the water. A mad scramble to tie-in to the world’s biggest pipeline, the ocean, has been launched by some of the biggest dry gas players looking to shop their wares. In the United States, multibillion-dollar propositions have been made by Cheniere Energy (AMEX:LNG) to convert import terminals into liquid natural gas docking stations in both Louisiana and Texas for liquidation and export of dry gas. In Canada, a team effort between Apache (NYSE:APA), EOG Resources (NYSE:EOG) and Encana (TSX:ECA) (NYSE:ECA) has been proposed to connect Canadian natural gas to the world via an LNG export terminal at Kitimat, BC.

While world natural gas prices are fetching upwards of nearly $20/mcf in places like Japan, even the $8/mcf being seen in places like Poland and the Ukraine are profitable for producers who are seeing sub $3/mcf prices here in North America. But, even if the world gets piped into North America’s gas, this doesn’t fix the price scenario on the whole. Expectations on LNG are slightly over-hyped, because the capacity to ship can’t possibly match the supply glut this continent is in.

There’s a lot of time between now and the expected opening date for the Kitimat terminal, which is slated for 2015. And when it comes online, the capacity limits are 5 million metric tons of LNG per year, or the equivalent of 255 billion cubic feet of natural gas per year. To put this into perspective, Chesapeake just cut 182.5 billion cubic feet per year, which would be nearly 72% of the Kitimat capacity. That’s right, the cut of 8% of Chesapeake’s production represents almost three quarters of the entire LNG facility’s capacity.

Sure, there is a savior on the water, but it won’t be everyone’s savior. Thus, we’re going to see a lot more of these pullbacks in the near future from primarily dry producers, and a movement into liquids to save face and step into today’s reality of cheap gas and expensive drilling.

G. Joel Chury
Editor in Chief
VantageWire.com

Disclaimer: No information in this article should be construed as individualized investment advice. A licensed financial advisor should be consulted prior to making any investment decision. VantageWire makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the VantageWire only and are subject to change without notice. VantageWire assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this article and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. The author of this article does not currently own shares of any of the companies mentioned in this article. Furthermore, VantageWire assumes no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this article.

G. Joel Chury

G. Joel Chury is a veteran investment columnist for Resource World Magazine and the Editor in Chief of VantageWire.com. His knowledge of both the mining and oil and gas sectors along with his ability to sift through TSX.V data and press releases makes him one of the best up-and-coming newsletter writers on the web.

With a diverse background that includes investor relations writing and consulting for publicly-held companies and previous field work as a surface land agent for oil and gas companies, Mr. Chury seamlessly translates technical results geared towards engineers and geologists into a more readable language that’s palatable for investors on the go. As well, Mr. Chury is an avowed silver bug, always willing to join the debate on where the precious metals market is heading.


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