A Perfect Marriage
John Myers

It's no secret - the world is draining dry its oil inheritance. Outside of the Middle East, a new giant oil field hasn't been discovered in 30 years. America has only 21 billion barrels of oil reserves left, enough to meet demand for just two years.

Even in the Middle East, new oil fields are becoming harder to find. Meanwhile, China and India hunger for vast amounts of energy to satisfy a population of 2.3 billion people demanding the comforts of an industrial economy.

Alternative energy sources are no elixir. Giant windmills spin, but only when wind blows. In North America, the last nuclear power plant was built in 1978, and scientists are still vexed with what to do with the radioactive waste. Hydrogen can power vehicles, but only if the vehicle is as big as a bus.

Yet there are two energy sources that can indeed meet the world's demands for the next half-century - oil sands and natural gas. The latter just happens to be the fastest- growing primary energy source in the world.

The Department of Energy projects that 900 of the next 1,000 U.S. power plants built will burn natural gas. Worldwide, consumption of natural gas is projected to more than double between now and 2025. But the most robust growth in natural gas demand will occur in the developing world, where demand is expected to rise by 4% per year.

According to the Department of Energy, "Much of the growth in [the developing world] is expected to fuel electricity generation, but infrastructure projects are also underway for natural gas to displace polluting home heating and cooking fuels in major urban areas, such as Beijing and Shanghai."

It would seem like a perfect marriage: The nations with the largest amounts of natural gas - like Russia and of course, the Middle East - are eager to sell, while the nations with the greatest need for natural gas are eager to buy. And since natural gas is a clean fuel, even the environmentalists are happy.

However, there is one problem: How do you get that gas from the countries that hold major gas reserves - distant countries like Iran, Saudi Arabia or Venezuela - to the United States?

Unlike oil, which is liquid at room temperature, methane is gaseous. In its natural form, the only viable way to transport natural gas is via pipeline. But to move massive amounts of natural gas through pipelines from, say, Saudi Arabia to China is not only economically unfeasible, but politically foolhardy. Fortunately, there is a solution: Liquid Natural Gas, or LNG.

Liquid Natural Gas is methane cooled to less than -161°C. At that extreme temperature, it becomes a boiling liquid that can be stored in heavily insulated tanks. Every chemistry student knows that such extreme temperatures are difficult to achieve, even in a test tube. Yet great technical advances over the past half-century have made the conversion and transportation of liquid gas economically feasible.

The first experiments with turning methane to liquid were carried out in the United States in the 1950s. In 1959 LNG was delivered to England. Commercial deliveries of LNG from Algeria to Europe began in 1964, and five years later the industry grew greatly when steady deliveries of LNG were made from Alaska to Japan.

The Arab oil embargo in 1973 spurred growth in the industry, and the first LNG supply contracts were signed. During the 1970s, four LNG terminals were built in the United States. However, the development of gas pipelines from Alaska and Canada to U.S. markets resulted in the collapse of LNG sales to the United States.

Yet the LNG market bounced back and grew steadily in the 1980s and '90s, principally with imports moving to Asia and Europe. The necessity of LNG, coupled with cost-cutting technologies and economies to scale, have made LNG an increasingly competitive fuel source.

Since 1999, the high cost of crude oil and a sharp increase in demand for natural gas have resulted in the rapid growth of the market for LNG. Today's major LNG market is Asia, where 71% of the world's LNG cargo is delivered. But other markets are already opening up: Europe, for instance, where LNG terminals in Spain, Portugal, Turkey and Greece will probably soon be joined by terminals currently under consideration in France, Italy and Spain.

The interest in LNG has also spread to our portion of the globe. An LNG terminal was completed in Puerto Rico in 2000, while another is under construction in the Dominican Republic. There is even a proposal to build a terminal in Mexico, a country with considerable oil reserves.

But the interest in LNG doesn't stop there. In the past three years, new production and port facilities have also been built in Oman, Qatar, Nigeria and Trinidad.
Clearly, any past prejudices against LNG and concerns surrounding producing and delivering it are dissipating. "What is [now] being challenged is the mystique about LNG technology - that in order to be viable, LNG plants must be large, with increasing sophistication and complexity," says Martin Houston, a senior LNG administrator. "In addition there was the view that only a few companies had the necessary technical expertise to undertake LNG projects."

With production and delivery concerns subsiding, interest in LNG is growing. Currently, LNG makes up only 6% of the world's natural gas trade. But as demand for natural gas grows - especially in the developing world - the LNG industry will see a surge in growth.

Between 1995 and 2001, pipeline exports grew by 39%. The LNG trade grew by 55%. And think about this: World LNG trade totaled 120 million tons in 2002. It is expected to surpass 160 million tons by 2006, a growth of another 34%.
That kind of growth is extraordinary, especially for an energy thirsting world... and it's phenomenal for real asset investors. Look for exciting opportunities ahead in this sector, as the market for LNG really gets off the ground.

Regards,
John Myers

P.S. LNG is clearly a subject of increasing attention... especially since last summer, when Energy Secretary Spencer Abraham proposed holding a LNG summit, which took place in December of 2003. Fed Chairman Alan Greenspan is also singing the praises of LNG, noting that LNG is an important industry that can act as a "safety valve" for the energy needs of the United States.

That's a lot of attention to pay to a relatively new industry. Yes, LNG has been around since the 1960's, but only recently have energy leaders stressed its importance in meeting the world's future energy needs. That's an important factor to remember.

Since these developments are so new, now is the time to get in on this sector.Editor's note: John Myers - son of the great goldbug C.V. Myers - is the editor of Outstanding Investments. Our man on the scene in Calgary, John has his fingers on the pulse of natural resource profits - including oil, gas, energy and gold.

This essay was originally published in the February edition of Outstanding Investments, in which John takes an in-depth look at opportunities to profit from the exploding market for LNG. To learn more, subscribe to Outstanding investments (you'll also get a free peek at John's shocking exposé on the advent of the gold dinar):