In researching the future of natural gas, I often get sidetracked by media reports on natural gas fracturing. They are almost always factually inaccurate. I am very familiar with the arguments as to why natural gas prices should increase. However, the last time I checked, supply and demand were the key components of commodity pricing.
I'll defer to the opinions of Encana President and CEO Randy Eresman when it comes to the future of natural gas. I think it is fair to say that the massive increase in natural gas supply is a positive black swan. These quotes from Eresman are from a recently published in Alberta Venture Magazine (click here to read):
"We're starting to measure our development inventory in the range of 30, 40 or 50 years, and for an E&P [exploration and production] company historically we would have inventories that we were one or two years ahead of us, if we were lucky."
"We do see an abundant supply of natural gas in North America, and with the time it will take to significantly increase the demand that can't be met by continued development of natural gas in North America prices are going to definitely be in the lower band"
"The one thing we didn't realize was how many plays would be accessible with the new technologies, and so we had thought that over time we would still see a rising price. Unfortunately for us that's not the case, so now our business is more focused on being the lowest supply cost in amongst that portfolio of new natural gas plays in North America."
"Natural gas can play a very big role, in the transportation sector in particular, in displacing the oil that's now used for gasoline and diesel"
"Most commodities, as they evolve, become scarcer and scarcer. We've changed that paradigm completely."
The wind is not at your back if you choose to speculate in natural gas producers. However, cheap abundant natural gas is a positive black swan (not all black swans are negative, just ask a lottery winner).
What happened to the natural gas business is a case study on how commodity bull markets end.
Just because I believe that abundant natural gas is a gift from the sky, doesn't mean that other's will agree with me. However, I expect natural gas consumption for vehicle transportation will increase dramatically over the next decade. Indeed, US President Barrack Obama made the following decree in his recent energy address (click here for the full transcript). It might even make economic sense if oil prices continue to rise.
"Today, I am directing agencies to purchase 100% alternative fuel, hybrid or electric vehicles by 2015. All of them should be alternative fuel.
Companies with exposure to the roll out of natural gas as a transportation fuel will benefit immensely from this trend. There are two companies that are well poised to benefit:
Clean Energy Fuels (CLNE), a provider of natural gas fuel for transportation in North America, including compressed natural gas or CNG and liquified natural gas or LNG.
Westport Innovations (WPT.TO), which Has developed technologies to allow high-performance, fuel-efficient engines to run on natural gas, and hydrogen. Before Obama's speech on March 30, shares traded just shy of $19, Tuesday's close for Westport was $23.84.
UPS is already using Westport HD engines in 11 trucks that make the round trip from Ontario in Canada to Las Vegas, Nev., and back on a single tank of fuel. In February UPS ordered 48 more LNG powered heavy tractor trucks. UPS has over 100,000 ground vehicles of which 1,914 use alternative fuels. Currently about 1,100 are running on LNG or CNG. UPS expects to dramatically expand the number of long-haul Western routes using LNG vehicles once a fueling station in Las Vegas is completed. Clean Energy Fuels will provide the fueling station.
Jim Letourneau is a geologist and speculator based in Calgary, Canada who publishes the Big Picture Speculator blog and newsletter www.jimletourneau.com. He has served as an expert witness on unconventional gas accumulations in front of Canada's National Energy Board. He will talk about "What Everyone Ought to Know About Hard Assets" on Tuesday, May 10, during the New York Hard Assets Investment Conference.