Mailbag: A Timeline for the Natural Gas Revolution

Source: James Baldwin, Money Morning  (2/22/12)

"The U.S. will likely see an increase in solar, wind, geothermal and other 'green' sources. However, these alternative sources are not enough to fully replace such an enormous amount of power. As a result, the country will turn to natural gas to fill the void."


The energy markets are really heating up right now.

With gasoline prices surging to historic highs and natural gas prices falling to historic lows, we've gotten many questions lately from subscribers wondering about the best ways to play the energy markets.

So, I want to take the time right now to answer a great question I got about natural gas last week, and, in the process, provide you with a timeline for you to profit on the coming "natural" revolution.

Remember, if you have a question or a comment of your own, be sure to register below and type your thoughts into the box. We'd love to hear from you.

Q: Can you give us a timeline as to when gas will be in such great demand? What is "long term" as you put it for our investments? Thank you for your expertise on the gas and oil investments.—Jere R.

If you watch CNBC or any of the other financial news channels, you're probably hearing a lot about the opportunity to invest in natural gas. They're chatting up natural gas vehicles, pipeline companies, and anyone else who is pulling this stuff out of the ground.

But what they don't discuss are the fundamentals. And if you are too swept up in the hype to acknowledge them yourself, you could miss out on some of the best opportunities to invest.

That's why I chatted with Kent about this question last week, to get his take.

What we want to evaluate is natural gas's long-term prospects.

And the reality is, natural gas has a very bright future in the United States.

Kent argues that the crux to increasing gas demand will be realized from four events.

1) Power Plants Are Coming Offline

By 2020, more than 90 gigawatts (GW) of electricity generation will come offline. Most of this power reduction will come from the retiring of coal-fired power plants.

Ninety GW is an immense amount of power. And it won't be easy to replace—at least, not without a plan.

The United States will have to turn to alternative sources.

Now, no coal-fired or co-fueled (a combination of coal and natural gas) plants have been planned. The United States will likely see an increase in solar, wind, geothermal, and other "green" sources. However, these alternative sources are not enough to fully replace such an enormous amount of power.

As a result, the country will turn to natural gas to fill the void.

Kent currently estimates that new natural gas plants would account for 1.2 billion cubic feet (Bcf) per day of additional natural gas usage. That's more natural gas than would be needed to power the state of Delaware for an entire week. And that might be a low estimate given our regulatory environment.

As the EPA introduces tougher noncarbon emission standards for mercury, sulfurous and nitrous oxide, regulations could easily push another 20 GW from coal to natural gas in the near future.

2) and 3) Natural Gas Is Replacing Conventional Fuels

The second and third demand factors also come from companies using natural gas as a replacement for conventional fuels.

At the moment, greater usage is being made (and even more so in the future) of natural gas as feeder stock for the production of petrochemicals rather than crude oil. Yet as the price of crude oil rises, and regulations target carbon emissions, companies will look to natural gas a lower-cost alternative.

That's one.

There is also a continuing shift toward compressed natural gas (CNG), liquid petroleum gas (LPG), and liquefied natural gas (LNG) as replacement for diesel as transport fuel with further movement into lighter engines (not just trucks) coming down the road.

We've discussed in the past how companies like Clean Energy Fuels (NASDAQ:CLNE) and Westport Innovations (NASDAQ:WPRT) are leading the transition toward natural gas fleets, fuel stations, and other transportation advances.

4) Global Demand for LNG Is Soaring

Finally, international demand for natural gas will be a game changer for the U.S. markets.

Like the United States, foreign countries are transitioning their economies away from coal-fired and nuclear power plants. An energy-starved world is hungry for cleaner, safer and cheaper sources of power.

U.S. companies are fully prepared to begin transporting LNG to foreign customers, especially as domestic prices hit rock bottom.

These companies are setting the stage and guaranteeing these customers long-term supplies. This has been highlighted by Cheniere Energy Partners (NYSE.A:CQP) signing a series of recent megacontracts to supply LNG to customers in places like Europe and India.

This stage began to boom last year and will likely dominate the news cycle well into 2014.

The final stage is the period where the ongoing supply meets new end markets of consumers. This period will occur when companies like Cheniere actually begin exporting natural gas to foreign buyers.

But, as we've said before, no LNG will actually move out of its terminal at Sabine Pass until 2014.

Still, when these exports begin, we're going to see the price of natural gas start to take off.

This is an important point, and something I highlighted two weeks ago. It is a period where the market demand curve will shift due to a huge boost in potential customers.

Once these companies prove they are capable of exporting without any hiccups, and the full supply chain is working in unison, then we will see natural gas demand reach far higher levels than we see today.

Given current market conditions and these four demand sources, late 2014/early 2015 appears to be the time when the LNG markets will be in full swing.

In fact, the natural gas sector offers fantastic investing opportunities through the end of the decade.

But it's important to remember that if you're bullish on natural gas, you don't want to wait until then to invest. Now is the time to seek the best long-term investments. After that, you can sit back and watch as global demand pumps profits into your trading account.

And won't that make $5 a gallon at the gas pump a little less painful?

Sincerely, James

James Baldwin, Money Morning

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