Liquefied Natural Gas Expands

By Aaron Levitt | February 27, 2011 AAA

As nations around the globe continue to grapple with the nuclear crisis in Japan and the rising energy demand around the globe, various new energy alternatives are being explored. Various governments have taken a pause from their nuclear ambitions to re-evaluate and they have taken steps to add an assortment of energy production to their power generation pies. Funds like the Market Vectors Global Alternative Energy ETF (NYSE:GEX) have risen in the wake of the crisis. However, replacing gigawatts worth of lost energy is no easy task. While solar, wind and biofuels will all get their place in the sun. One choice is already heating up.

TUTORIAL: Commodities

A Growing Market
With the United States love affair with shale gas, most investors are not familiar with liquefied natural gas (LNG). Essentially, LNG is gas that is cooled under pressure and converted to a liquid for transport by tanker ships to markets not connected by pipelines. The fuel is then converted back to a gas at various import terminals. Analysts estimate that global production capacities of LNG will more than double by the end of the decade and LNG imports are seen as growing an incredible 8.2% per year over that time. Over the next 30 years, the Internatinoal Energy Agency (IEA) predicts that this growth will require a $250 billion investment in liquefaction plants, coastal re-gasification import terminals and special tankers. Unlike the U.S., in the Asian Pacific, the market for LNG fuel sources is booming. Indonesian demand for LNG will require up to 70 new small-scale power plants by 2020 and Philippines will require up to 45 plants. The estimated demand for northern Vietnam is around seven power plants. Japan is the already the largest importer of LNG in the world, accounting for 36% of global LNG imports in 2009. The loss of nearly 10% of its nuclear capacity will have it looking at increasing its use of LNG sources. (learn more in ETFs Provide Easy Access To Energy Commodities.)

Currently, the Middle East nation of Qatar leads the world in liquefied natural gas exports. However, Australia is undergoing a massive infrastructure expansion project in the sector and is expected to eclipse Qatar's production with 10 years. Australia's proximity to the faster growing Asian emerging markets will undoubtedly help its LNG plans. Chinese energy company, PetroChina Company (NYSE:PTR) has already agreed to buy about $41 billion worth of Australian LNG over a 20-year time frame. This deal, plus purchase agreements from India and other South East Asian nations, will cement the growth of LNG in that region of the world.

Playing the Expansion of LNG
Japan had planned large increases to its nuclear power output to meet its energy needs. Thirteen reactors, or about 17,800 MW, are in planning stages and could be shelved, given the recent crisis. These megawatts will most likely be made up with LNG. The rest of Asia will continue to use the fuel source in increasing amounts as the new infrastructure is built. With the long term bull market in LNG just getting started, investors may want to commit some capital to the sector. (Mutual funds devoted to keeping roads, structures and communities safe can make you money, see Build Your Portfolio With Infrastructure Investments.)

Australia's Gorgon field could hold as much as 50,000 billion cubic feet of gas and is one of the major LNG projects under way in the nation. Several Japanese utilities have agreed to purchase fuel from Gorgon and India signed a 20 year, $25 billion deal for a share of its imports. Chevron Corp. (NYSE:CVX) owns nearly 50% of the reserves and minority partner, Royal Dutch Shell (NYSE:RDS-B, RDS-A) is already a leader in Asian LNG, with projects in Malaysia, Brunei and East Russia. Both represent great plays in the LNG market.

Both Teekay LNG Partners (NYSE:TGP) and Golar LNG (Nasdaq:GLNG) represent plays on shipping that gas to other markets. Shipping rates have doubled from less than $30,000 a day to over $60,000 since the summer. While both tend to operate on longer-term contracts, any increased charter pricing will benefit the pair as these contracts are renewed.

Finally, Cheniere Energy (NYSE:LNG) and Chesapeake (NYSE:CHK) are working on building the first liquefaction plant in the U.S. in over 40 years. The plant could start exporting LNG by 2015 and could be huge for the domestic natural gas industry.

Bottom Line
The scope of the Japanese crisis has many nations wondering about how they will meet the demand for-ever increasing fuel requirements. One possible and growing solution is that of liquefied natural gas. Overall, long-term demand for LNG is growing and newly built infrastructure will help spur on that demand. Investors with long term timelines may want to consider adding some capital to the sector.

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