Welcome to 2012!
The weather has been great here in the Bahamas. I'll be back in the U.S. one week from today.
But that doesn't mean that I can take even a day away from the energy markets.
Already, developments are well underway that will have a major impact on energy investments deep into this new year.
Take this brewing situation between Qatar and Russia, for example.
It may not be on some analysts' radars yet, but this event will likely boost natural gas prices in the United States.
And that is something we've been waiting to see for quite some time.
The First Big Agreement of 2012
Qatar is the second-largest exporter of gas in the world (after Russia). The Persian Gulf state is also the only country thus far to commit all of its exports to liquefied natural gas (LNG).
As we've explored in the past, the LNG delivery process cools gas to a liquid, moves it by tanker, and then re-gasifies it on the other end, greatly simplifying it (and cutting down on expenses). LNG is of a superior quality to pipeline gas. LNG is purer, has higher methane and energy content, and has a more stable composition.
The LNG trade is going to be one of the major changes in the energy sector over the next several years. Worldwide, upward of 90 terminals are under construction or in the planning stages, and they are going to have a decisive impact on how energy is delivered and used around the globe.
They will also have a significant impact on the politics of global energy.
Right now, Russia is moving on a major LNG project in far northern Yamal (part of northwestern Siberia.) And Qatar wants a piece of it.
In their negotiations, Doha (the Qatari capital) pledged to Moscow that it would not increase LNG exports to Europe in return for the right to participate in the Yamal LNG effort.
From the Russian perspective, Qatar's expertise in LNG production and transport, along with a considerable amount of available capital to invest in the project, make the country an ideal candidate. That the agreement would also limit Russia's primary competitor in its dominant European market position does not hurt, either.
Doha is also the site for the Gas Exporting Countries Forum (GECF), the association that represents over 60% of the world's conventional gas supplies. Nations like Iran would prefer GECF to act more like OPEC does for oil and make "cartel decisions" to determine price.
Russia, on the other hand, does not want its gas export flexibility limited by the national quotas that would result from cartel involvement, as is the case with OPEC. As a result, the GECF has been little more than a debating society that issues watered-down memoranda.
In fact, its last "summit" on November 15 attracted neither heads of state nor major government figures from most of the members, including Russia.
And despite being headquartered in Qatar, GECF just reappointed Leonid Bokhanovsky, a Russian, for another term as its secretary general. His reappointment guarantees that we will not see a natural gas version of OPEC anytime soon.
However, the Russian-Qatari bilateral agreement would certainly breathe new life into the forum and provide the first example of where the organization may be heading in coordinating gas export agreements among its members.
For Moscow, the rapid increase of LNG coming into Europe has created a new gas spot market that has underpriced the longer-term contracts for delivering Russian gas via pipeline. That has obliged Gazprom, the Russian gas behemoth, to reduce prices. As a result, the company has lost billions of dollars in revenue.
Capping Qatar's LNG exports to Europe, therefore, could be decisive in rescuing Gazprom's bottom line. Europe remains by far the dominant end user for Russian exported gas.
The Kremlin is regarding the combination of its gas moving west by both pipeline and LNG (from the Yamal project) as the most desirable outcome. And Qatar sees its participation in Yamal as a way of influencing both LNG volume and pricing elsewhere.
Seemed to be a win-win solution.
Yet, it also is going to benefit gas producers in the U.S, making it a win-win-win situation.
I have previously discussed how the exportation of LNG from the U.S. market would serve as a major boost to unconventional shale gas production. The amount of unconventional gas coming from nearly 30 major basins in the U.S. will produce a continuous surplus of volume on the market, straining prices.
Unless there are new outlets developed for its use.
Three Options for LNG Use (and Why One Is the Best)
One new use is the rapid rise of gas as the fuel of choice in generating electricity.
With major coal-fired plants going off-line between now and 2020, and with plenty of gas to replace them, a major transfer of generating fuel is going to take place.
A second would be advances in using gas as a fuel to replace gasoline in vehicles and crude oil as feeder stock for petrochemicals. There are movements in both directions underway.
But the rise of LNG exports is now a seriously considered option. Facilities are already being developed or plans in the works to retrofit existing LNG import terminals to move product out.
Dominion Resources Inc. (NYSE:D) runs the largest East Coast LNG-receiving terminal at Cove Point, Maryland. Recently, it applied for permissions to transform half of its capacity from import to export.
Cheniere Energy Inc.—which has a most appropriate stock symbol (AMEX:LNG)—has the Sabine Pass megaexport facility on the Texas-Louisiana border under construction, and three huge multiyear contracts with major foreign LNG importers already in place.
Europe will be the primary destination for most of these exports, with additional LNG terminals likely.
In other words, the agreement to cap European-bound LNG exports from Qatar may have been negotiated by Russia to benefit its European trade, but it will also benefit the U.S. as a major new source for LNG to the continent.
Of course, politics have a habit of complicating matters.
On November 29, a Russian ambassador was roughed up going through customs in Qatar for refusing to allow an inspection of his diplomatic case. The Russian foreign minister has threatened to introduce reprisals, and the Yamal negotiations are at a standstill.
Nonetheless, this matter will cool down in time, and the Russian-Qatari arrangement will move forward. Both nations have too much at stake to let it collapse.
When it does, another primary beneficiary will be U.S. shale gas producers, whose volume will become LNG moving to Europe to take up the slack. Projected European energy needs point toward a need for all pipeline and LNG delivered gas. That means this market will be expanding.
As for the current diplomatic tiff between Moscow and Doha, that is helpful in the U.S., where significant LNG exports are still some two years away. By the time the Russian and Qatari leadership have worked out their differences and the Yamal project is moving along, Americans will be in the LNG market. . .in a big way.
I look forward to sharing more on this story throughout 2012.
Kent Moors, Money Morning