Japan’s nuclear disaster, and subsequent shift away from the power source, has left the country short on power. With few natural resources of its own, it has been importing what it needs. Natural gas is a big part of that, but The United States isn’t a player… yet.
Nuclear Concerns
Japan suffered one of the few nuclear power related disasters that have been seen in the world. However, it was a horrific, slow motion event that left permanent scars on the nation’s psyche. It also resulted in a major energy shift that has left the country dependent on foreign nations for its energy.
This dependance is unlike the often tense oil relationship that exists between The United States and the middle east. In a pinch, The United States has enough energy sources to live, perhaps uncomfortably, without foreign oil. Unless Japan is willing to restart its reactors, it has no choice but to deal with countries that it might otherwise choose not to. Natural gas is now a vital feedstock.
Who’s Gaining
Bloomberg reports that Japan is the largest importer of natural gas and that 2012 was a record year for imports of the fuel. Where is it getting this gas? “from nations such as Qatar, Russia, Australia and Indonesia. But the U.S. share of this business has been tiny.”
This is unfortunate. There are, of course, many reasons why we can’t supplant a country like Russia. The biggest is that The United States currently lacks the infrastructure to export large amounts of natural gas. Another reason is that some politicians seem to think that exporting the fuel is a mistake.
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Who Loses
The good news is it seems increasingly likely that natural gas will be exported. And it’s a good thing, too. Despite having an abundance of the fuel, there is so little demand in the States that the commodity is trading at historical lows. It is actually unprofitable for many drillers to bring the fuel out of the ground.
Indeed, the average industry cost for drilling fuel is around $7 per Mcf. It’s been trading well below that, recently hitting the $4 range. No wonder drilling activity isn’t as high as it was just a few years ago. While there’s a shift toward using natural gas for electric power in this country, it hasn’t been enough to keep demand and pricing high.
So, to date, drillers in the U.S. market have seen boom times and, now, bust times. It hasn’t been pretty, taking once dominant companies like Chesapeake Energy Corporation (NYSE:CHK) for a wild ride. When prices were high, the company aggressively expanded in the natural gas arena, buying land and taking on debt.
Who Wins?
If an export market opens up for natural gas, via liquified natural gas (LNG) sales, it could be a life saving event for Chesapeake Energy Corporation (NYSE:CHK). More money coming in the door would make paying down its onerous debts that much easier. However, Ultra Petroleum Corp. (NYSE:UPL), among the lowest cost producers, would be one of the first to benefit.
It costs Ultra about $4 per Mcf to pull natural gas out of the ground. That means by the time that other companies start making money, Ultra Petroleum Corp. (NYSE:UPL) will be making money hand over fist. And, right now, Jim Roumell of Roumell Opportunistic Value Fund (RAMSX), thinks Ultra is among the best plays in the natural gas drilling industry.
Bigger players are likely to benefit, too. For example, both Exxon Mobil Corporation (NYSE:XOM) and Royal Dutch Shell plc (ADR) (NYSE:RDS.A) made notable bets on U.S. natural gas in recent years. Both companies are predicting that gas overtakes coal as the second most widely used energy source in the world.
This push, however, has been a drag on both companies’ results so far because of the price collapse. If an export market opens up, both would be quick to jump on it. Shell has years of experience with LNG in Europe, which makes it particularly interesting as an investment option. Not that Exxon Mobil Corporation (NYSE:XOM) isn’t a great company, but Shell’s yield is about double that of Exxon’s despite the overall similarity between the two companies.
Selling to Our Friends
LNG exports would be a boon for the U.S. natural gas industry. And we wouldn’t even have to deal with rogue nations, since our friends need the fuel just as much as we want to sell it. All of the above companies would benefit from that demand.
The article Desperate for Gas originally appeared on Fool.com and is written by Reuben Brewer.
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