Natural Gas Prices Driven By LNG Imports? (DVN, CHK)

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There are some issues surrounding natural gas that is keeping a cap on the sector.

Spot prices are bouncing around between $3.50 and $4.00 per thousand cubic feet. At those prices, unconventional shale gas plays are largely uneconomical.  The big US shale plays are the Barnett Shale in the Dallas-Fort Worth area and Arkansas’ Haynesville Shale, where companies like Devon Energy Corp. (NYSE:DVN) and Chesapeake Energy Corp. (NYSE:CHK) own vast drilling rights.

Platts has noted that shale gas needs prices to be at least $6.50 per thousand cubic feet in order to make development economically sound.  Major new LNG liquefaction plants around the world are beginning production, which should increase worldwide production and lower prices. The US is a likely target for a substantial share of that new production because the US market for natural gas is far more liquid than either European or Asian markets, and gas storage facilities are readily available in the US.

Before too long we’re likely to see US natural gas prices being driven by spot LNG prices. Maybe not yet in 2009, but the day is on its way.

Chesapeake Energy (NYSE: CHK) has been battered.  We included it in our list of energy companies whose stocks could double, but that is out to the end of 2010.  A lot has to happen in the sector.

Paul Ausick
March 12, 2009