China's huge thirst for shale gas... A new way to transport gas... Why the U.S. will remain the top spot for shale... The biggest opportunity in Porter's career...
The thirst for natural gas around the world continues.
As we have said before… the U.S. is producing incredible volumes of natural gas… Once we start exporting our massive new supplies, the market for natural gas will become a global one – with consistent global prices – just like the oil market.
And it looks like China will become one of our largest customers...
China's liquefied natural gas (LNG) imports could make up 35% of its needs by 2015.
According to contracts already in place, China could purchase as much as 93 billion cubic meters (bcm) of natural gas in 2015. China's economic planning agency, the National Development and Reform Commission (NDRC), estimates the country's domestic production will equal 176 bcm by the same year. (That number is likely high, more on this below.) The NDRC says consumption will increase 20 bcm every year to 230 bcm by 2015.
Natural gas represents only 4.6% of China's current energy consumption. That is far below the global average of 24%. China's government has pledged to increase the natural gas share to 10% by the year 2020.
Through the end of October (the most recent available figures)… China had spent $6.9 billion on gas supplies via pipeline from Turkmenistan and Uzbekistan. It spent another $6.6 billion on LNG shipments – the majority of which arrives from Qatar and Australia.
And a report from petroleum giant BP estimates China accounted for around 22% of Asia-Pacific gas consumption and about 4% of global demand.
China's demand for natural gas will grow to massive proportions over the coming decades. And it's not the only Asian giant with a thirst for gas... India is the second-most populous country on the planet. Today, gas only makes up 7% of its energy consumption. (Again, the global average is 24%.) And India only produces about one-third of what it consumes.
Currently, Japan is the world's largest natural gas importer. Its reliance on gas only grew after the tsunami and the resulting Fukushima nuclear power-plant disaster. Last week, Japan Petroleum Exploration Company (JAPEX) announced plans to build a LNG import terminal – the first on the Pacific coastline. It's slated to begin operations in 2018.
Currently, Australia and Qatar are the leading suppliers of LNG to Asia. But Russia and other eastern Europeans want in on the Asian market... Russia wants to sell to China via a pipeline agreement… But China is balking at the high prices Russia demands. (Russia gouges most of Europe with high natural gas prices.)
Until now, to transport gas from Russia to Asia, you had to go through the Suez Canal. Or... go all the way around Africa. But the Wall Street Journal reports a tanker is traveling through the Arctic Ocean... It should arrive in Japan on Tuesday.
The Arctic route takes three weeks less than the Suez Canal route and costs around $3 million less (considering LNG tankers can cost $150,000 per day). But this route is only available a few months a year. And only a few ice-class LNG tankers exist today.
China is estimated to have more shale reserves than the U.S. and Canada combined, but the U.S. will maintain its dominant position for years...
The Chinese government aims to raise its annual shale-gas output from almost nothing today to 6.5 bcm by 2015 and as much as 100 bcm by 2020. But according to energy research and consulting firm Wood Mackenzie, China will be lucky to reach one-tenth of its goal by 2020.
China's challenging geography, scarce water resources, and lack of foreign partners are hampering its efforts to boost shale gas production... Most of the shale is in arid or heavily populated areas... "To create a flat drilling pad, we almost always have to take out some part of a hillside and basically someone's rice paddy," Simon Henry, Royal Dutch Shell's executive director for the Asia Pacific region told the Wall Street Journal.
Other countries around the world also have huge shale reserves and are facing similar headwinds...
Poland, for example, is believed to have some of Europe's most promising shale plays in the world. But early wells produced less gas than expected. Also, community opposition and changes to the tax and royalty rules have hurt the industry. Oil giant ExxonMobil, an early Polish shale explorer, pulled out of the country after drilling only two wells, saying it didn't find enough oil or gas to continue.
And Argentina recently nationalized the assets of a Spanish company that discovered a shale deposit containing nearly 1 billion barrels of oil. In addition to government instability, it's expensive to drill in Argentina... Oil and gas exploration firm Apache, which has the rights to drill in 450,000 acres of Argentine shale, says it can cost twice as much to drill a well there as in the U.S... And it costs two to four times as much to perform the hydraulic fracturing (or "fracking") needed to release the gas trapped in the shale so the well can produce meaningful volumes of oil and gas…
Countries like France and Bulgaria have banned fracking altogether. "There was enormous irrational exuberance for global shale development," Joseph Stanislaw, an independent senior energy adviser to Deloitte LLP, told the Wall Street Journal. "Then the industry ran into reality. Global shale will happen and when it does begin, it will take off with the same force we've seen in the U.S. But the timeline will take longer than people think."
The U.S. shale boom will have repercussions around the world... In the U.S., we have a glut of cheap natural gas. Yet Asia can't get enough of the stuff and pays five to six times more for it. Europe is short on gas as well and currently pays three or four times its price in the U.S. The U.S. is about to become the world's biggest natural gas producer. Asia and Europe both want access to our massive supplies and cheap prices. And within a few short years, we'll have facilities in place to supply them.
Porter calls it the biggest opportunity in his career. He recently produced a series of reports that covers all aspects of the boom and the industries that stand to benefit most from it… In fact, Porter says the changes will not only remake the energy sector, but will create immense political power in Washington… To learn more about how Porter sees the energy boom playing out and how to access his research on the phenomenon… click here...
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Editor's note: Today, we're proud to introduce our newest product Digest Premium. Our goal with Digest Premium is to give you a "Friday Digest" every day…
As you know, every Friday, Porter writes the Digest personally. And in those Friday editions, he tries to teach something of value… Digest Premium will be like getting an educational "Friday Digest" every day… Monday through Friday. In each Digest Premium, you'll get everything that's included in the regular Digest… plus we'll focus on one key topic of the day and give you more useful information on that subject.
Today's Digest Premium takes a closer look at one facet of the oil and gas boom going on in the U.S… Moving forward, you will receive this special premium section of the Digest every day. As we constantly work to improve our products, we'd love your feedback on this new service. Please send your notes to feedback@stansberryresearch.com.
Brazilian state-owned oil giant Petrobras is down 48% from its 52-week high…
But short-selling expert, and founder of hedge fund Kynikos Associates, Jim Chanos says it's still one of his favorite shorts.
We first started covering Chanos' Petrobras short in May after his presentation at the Grant's Interest Rate Observer conference in New York City. Though the company was trading for less than eight times earnings, Chanos thought Petrobras was a value trap.
For one, the company is partly controlled by the government… Chanos says it's poorly managed and fiscally irresponsible.
Also, the company's oilfields are all offshore. They cost a fortune to develop. (Petrobras expects to spend hundreds of billions of dollars over the next four years on capital expenditures.)
According to Chanos, given the high capital expenditures, shareholders likely wouldn't benefit even with oil trading for more than $100 a barrel. And right now, it's not close to that, trading for around $85.
Finally, the Brazilian government caps what Petrobras can charge its customers… So Petrobras shareholders are basically subsidizing Brazilian government policies.
The stock was around $24 a share when Chanos spoke in May. This month, when Chanos presented at the Sohn Conference in London, the stock was around $18… But he's still short.
Petrobras isn't the only short in the sector… We believe all offshore drilling companies are facing headwinds from the U.S. shale boom. It simply costs them too much money to pull oil from the ocean when U.S. shale is producing more oil and gas than we know what to do with.
To put it in perspective, North Dakota, home to the Bakken shale, is producing more than 700,000 barrels per day (bpd) of oil. It will soon overtake OPEC member Qatar, which produces 770,000 bpd. And the International Energy Agency expects the U.S. to overtake Saudi Arabia as the world's largest oil producer by 2020.
And U.S. shale oil is cheaper to produce…
EOG Resources, an exploration company with a stake in Texas' Eagle Ford shale, says it costs about $5.5 million to develop a well there. Meanwhile, an offshore Gulf of Mexico well can cost $100 million to develop.
Offshore drilling companies are paying up to $600,000 a day for its rigs (the average is around $300,000 a day)… And they're drilling down 40,000 feet in the middle of the ocean. Compare that with land drilling day rates… which S&A resource expert Matt Badiali says can run about $25,000 a day in the Eagle Ford.
Deep-water wells can take five months or more to drill… It takes a few weeks to drill a well in the Eagle Ford, according to Anadarko Petroleum.
The winner of the shale oil versus offshore oil is clear…
Why Petrobras Will Struggle to Compete in a Shale Boom…
Brazilian oil giant Petrobras has been a player in the international oil markets… but now that we're pulling immense volumes of oil from shale formations, it is in trouble.
In today's Digest Premium, we describe why it will struggle to compete in a world flooded with shale oil… and what other oil companies are prime short candidates for the same reason…
Why Petrobras Can't Compete in a Shale Boom…