VISIONS OF NATURAL GAS INVESTMENTS DANCING THROUGH MY HEAD
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Every decade has an investment theme. A sector or group of investments that you look back at wondering how you could have missed something so blatantly obvious? This is followed by the ritual calculations of the type of wealth you would have been able to accumulate had you seized the opportunity. In the 1990's, it was technology. In the 2000's, it was gold and oil. What sector will be the cause of our self-loathing in 2020?
One of the most obvious answers is natural gas. Let's go over some in your face facts regarding the potential for natural gas over the next decade and beyond.
Let's begin with the basics: natural gas is one of the cleanest burning fossil fuels. It is a cleaner alternative to coal and a more practical alternative to solar power. The United States has the largest natural gas reserves in the world. In 2010, JP Morgan analysts estimated that the United States contains 8000 trillion cubic feet of gas in place. Given the dramatic advancements in natural gas drilling techniques, up t0 50% of the 8000 trillion cubic feet of gas may be recoverable.
The largest oil companies in the world have seen the light. Over the past few years, there has been a massive shift of capital into the natural gas space on behalf of the major energy players. Here are some recent examples:
- Chevron just today announced that they will start engineering and design work on an expansion of the company's $43 billion dollar Gorgon liquefied-natural gas project in Australia.
- In December 2009, Exxon Mobil paid $41 billion to buy XTO Energy. This is seen as a direct bet on the future of the domestic natural gas market. XTO dealt primarily in the natural gas market.
- In November 2010, Chevron purchased Atlas Energy. Atlas was a major player in shale gas.
- BP has been investing in natural gas, through partnerships with US companies, since 2008. As recently as 2010, BP was in a joint-venture with a private company in an attempt to gain access to South Texas natural gas.
- In May 2010, Royal Dutch Shell paid $4.7 billion for East Resources, a major US natural gas and exploration company.
As the price of crude oil continues to move up in price, viable alternatives will be put on the fast track towards implementation. The large oil companies have come to the realization that the global market wants a cleaner energy source. Nuclear energy has been removed from the discussion indefinitely as a result of the disastrous events ongoing in Japan. Solar energy is seen by the major oil companies as a last resort. This is due primarily to the fact that they cannot control the market as it is driven by technology. Natural gas is THE alternative for the major players in the game.
Companies like XOM and CVX are in familiar territory when dealing with natural gas. They can proudly claim the "going green" tag line, while tapping into the massive amount of reserves that the United States contains. The massive investments that the major oil companies are making in natural gas should tell anyone that is willing to listen that the acceptance and dominance of natural gas is not a matter of if, but rather a matter of when?
The potential applications for natural gas are widespread. There are already 12 million plus natural gas vehicle in the world. I see cars on the road everyday in Los Angeles with CNG (compressed natural gas) stickers. This will be a lot more widespread by the end of this decade.
For electricity generation, power plants will increasingly be turning to natural gas over the next decade. Why? We are sitting on tons of it and it will remain relatively cheap. What are the alternatives for any country looking to build a new power plant?
Coal? Expensive and dirty.
Nuclear? One word: Japan. The memory of this disaster will be with us for the entire decade.
Natural gas will be the go to guy over the next 10-20 years based on price, cleanliness and efficiency.
I recently purchased a natural gas play for our portfolio. It is a company that I plan on holding onto for a long time to come. I feel we are the very beginning of the realization of the importance that natural gas will play in our energy future. The eventual valuations that the financial markets will assign to any company associated with natural gas will be nowhere near what they are trading at today. It is literally the bottom of the 1st inning for natural gas investment.
Regardless of the direction you decide to go, as always, do your research and allocate comfortably.
