Natural gas currently supplies about 22% of the world's energy needs. By 2040, that number will rise to around 25% according to an estimate by the International Energy Agency (IEA). While that might not sound like much of a difference, it suggests that natural gas demand will surge 45% in the coming years.
Natural gas is an abundant resource that's cleaner and, in many cases, cheaper than other fossil fuels. Because of that, there's plenty of it to meet global demand growth. However, it has one major disadvantage, which is that it must travel by pipeline, limiting its reach to local markets. The only way to increase its transportation flexibility is to turn it into liquified natural gas (LNG). That process requires a large up-front investment by natural gas companies to build liquefaction and export facilities so that the LNG can travel by ship to demand centers. Those investments have the potential to deliver a big-time payoff over the long-term because demand for gas is growing at a brisk pace, which could make LNG stocks very rewarding.
What is LNG and how is it produced?
LNG is the liquid form of natural gas. Companies make LNG at a liquefaction terminal, which consists of three main components: on-site LNG storage tanks, loading docks, and liquefaction facilities known as trains. The terminal also needs to be located on a deepwater ship channel near open water as well as close to major interstate gas pipelines that will supply the complex.
LNG trains use a refrigeration process that cools the gas down to -260 degrees Fahrenheit, at which point it transforms into a liquid and its volume shrinks 600 times. From there, the LNG flows into cryogenic storage tanks, which are designed for low temperatures to keep the gas cooled and in its liquid form. Companies then load the LNG into specialized gas carrying ships known as LNG carriers that transport it to market centers. When the LNG arrives at its final destination, it then goes through a regasification process at an import facility where it's pressured and regasified using heat exchangers that transform the LNG back into a gas so that it can flow through local pipelines.
Types of LNG facilities
Most LNG export terminals are large-scale onshore facilities that require significant capital investments and take a long time to build. For example, Cheniere Energy (NYSEMKT:LNG) launched its LNG business in 2012. The company completed its first train in 2016 at its Sabine Pass location in Louisiana. It currently expects to build six trains at that location and three more in Corpus Christi, with most of those trains coming online by next year. Once complete, the $23 billion investment will give the company the capacity to produce 40.5 million tonnes per year (mtpa) of LNG, which would make it one of the five largest global suppliers.
In addition to that, the industry is also building offshore facilities known as floating LNG (FLNG) terminals. Royal Dutch Shell (NYSE:RDS-A)(NYSE:RDS-B) is currently constructing the Prelude FLNG facility in Australia. The $14 billion offshore facility will produce at least 3.6 mtpa of LNG when it starts up.
Meanwhile, Golar LNG (NASDAQ:GLNG) is working on smaller scale projects to convert old LNG carriers into floating liquefaction vessels (FLNGVs) that can turn "stranded" natural gas, -- which are offshore fields that aren't currently viable due to the lack of a local market -- into LNG so that it access global markets. The company's recently completed work on its first FLNGV conversion (Golar Hilli), which has the capacity to produce 2.4 mpta from an offshore field in Cameroon. The company also has two more FLNGV conversions under consideration.
How LNG is transported?
LNG requires specialized LNG carriers to transport it around the world. These ships either have a series of cylinder tanks, known as Moss tanks, or a steel membrane built right into the hull that holds the LNG and keeps it cool. The specialized ships then transport LNG from an export facility to an import site where it can then undergo a regasification process and move through local pipelines.
Several companies in the LNG industry focus on operating gas carrying ships, including Golar LNG and Gaslog (NYSE:GLOG). Golar LNG currently owns 16 LNG carriers (including 10 under construction) while Gaslog owns 29 LNG carriers (with five on order). Gaslog has secured long-term contracts with major LNG producers such as Shell and Cheniere for the bulk of its fleet, which enables those companies to ship their LNG around the world while Gaslog earns steady revenue backed by the agreements. Companies will also charter some of their ships on the spot market, meaning they lease them at market rates, which can ebb and flow with demand. That enables them to make more money during boom times, but it also exposes them to market downturns.
What's the outlook for LNG?
Global LNG trade reached 293 million tonnes in 2017, which was enough to power 575 million homes according to Shell. That's an increase of 29 million tons in the past year and nearly triple the level from 2000. The bulk of that LNG is going to Asian markets, with Japan taking 28% of the imports, followed by China, where demand exploded 40% last year.
LNG demand is expected to continue growing at a brisk pace. According to a forecast by Royal Dutch Shell, it could potentially reach nearly 600 mtpa by 2035. Driving that increase will be a combination of rising natural gas demand due to economic growth as well as replacing domestically produced gas as legacy fields decline. Asia will lead the way, with it expected to make up 55% of projected worldwide demand growth through 2035.
Several companies, including Cheniere and Shell, are building new LNG export capacity in the U.S. and elsewhere, with Shell recently giving the green light to LNG Canada, a $31 billion facility on that country's west coast. Globally, companies are building around 80 mtpa of additional LNG export capacity, which should come online by the end of 2019.
However, that's not enough to meet anticipated demand much beyond 2020. Because of that, Shell believes that a global supply crunch could be coming in the early part of the next decade if companies don't greenlight new projects, which is why it recently sanctioned LNG Canada. That outlook suggests that the future should be bright for companies focused on building new LNG projects.
What are the largest LNG companies?
Many of the world's largest LNG producers are state-controlled companies. Qatargas, which is owned by the government of Qatar, is the world's largest LNG producer. The company operates 14 LNG trains that can produce 77 mpta, though other companies, including Shell, ExxonMobil (NYSE:XOM) and Total (NYSE:TOT) own minority interests in some of those trains.
While state-owned companies are a force in the LNG market, they're not alone as several independent publicly traded energy companies rank among the LNG market's biggest producers. The current leaders within that group are on the following table:
Liquified natural gas stock
Current LNG capacity
LNG Growth potential
Another 7.5 mtpa will come online when it finishes Prelude FLNG and LNG Canada.
Another eight mtpa will come online when it finishes all trains currently under construction.
It has the potential to add more than 20 mpta of additional capacity by 2025.
It expects its capacity to grow to 23 mtpa by 2020.
It recently started the second phase of its Gorgon project in Australia.
Outside of Cheniere Energy, major oil and gas producers dominate this list. Because of that, investors need to decide if they want an LNG-focused company or one that operates LNG assets as part of a more diversified portfolio. Both options have their benefits as well as drawbacks. To give investors a better idea of their LNG options, we'll drill down into some of the key players.
Royal Dutch Shell: The LNG king
Shell has become a major force in the LNG market in recent years. It vaulted to the top in 2016 when it spent $70 billion to buy BG Group, which not only boosted its gas output 25% but bolstered its presence in the LNG market. Another reason why Shell is a force in the LNG market is that it's one of the biggest natural gas producers in the world. While a large portion of that gas flows through pipelines to end users, the energy giant is working toward liquifying an increasing amount of its gas production so that it can take advantage of the fast-growing LNG market.
Shell currently owns stakes in 13 liquefaction plants around the world that have the capacity to produce 41 mtpa of LNG. Notable facilities include stakes in Qatar Gas 4, Gorgon in Australia (one of the largest and most expensive LNG projects in history), and Queensland Curtis LNG, which BG Group developed. In 2017, the company's facilities manufactured 33.2 million metric tons of LNG, which gave it a 12% share of the market.
In addition to producing LNG, Shell is a major force in the LNG trading market, buying it from third-parties and then selling it to end-users at either the going market rate or under oil-linked contracts. Those activities boosted Shell's LNG sales volumes to 66 million metric tons last year.
Shell's LNG business has ample upside in the coming years. The company currently has two expansion projects under way, Prelude (which is the world's largest FLNG facility in Australia) and LNG Canada. In addition to that, the company has several projects in various stages of development. The two closest to getting the green light are Lake Charles LNG (which is a project along the U.S. Gulf Coast with Energy Transfer Equity) and an expansion of the Sakhalin facility in Russia. Meanwhile, the company's LNG trading business will get a near-term boost since it has contracts to buy all the LNG produced by Kinder Morgan's Elba Island terminal near Savanah, GA, which will come online in 2019.
While many of Shell's large oil and gas producing rivals have LNG businesses, Shell is the most focused on becoming a dominant force in the market. Because of that, it's an ideal option for those seeking a less risky way to invest in LNG. Shell combines its LNG upside with operations that span across the entire oil and gas market. That diversification makes it less prone to a potential downturn in the LNG market, which could happen if LNG supply outpaces demand.
Cheniere Energy: Quickly becoming a dominant force in the LNG market
Cheniere Energy's main focus is on building LNG facilities along the U.S. Gulf Coast to export the country's growing supply of natural gas. The company currently has two LNG terminals under construction. Sabine Pass, its first operational LNG terminal, has four operating trains and one undergoing commissioning, giving it 22.5 mtpa of capacity. It ships the bulk of the gas produced from those trains under long-term contracts to four major buyers, which provides it with predictable cash flow.
Meanwhile, it has three trains at Corpus Christi under construction. Two should start up next year, while it expects to finish the third by the second half of 2021, adding another 13.5 mtpa of capacity. Those expansion projects will make Cheniere Energy a top-five global LNG producer by 2020 behind Qatargas, Shell, Malaysia's Petronas, and Total.
In addition to those trains already under construction, Cheniere Energy has several more in development. The company already has approval to build a sixth train at Sabine Pass, which could produce 4.5 mtpa. Further, the company has applied to expand Corpus Christi by 9.5 mtpa. On top of that, it owns land at both locations so that it can continue growing.
The bulk of Cheniere's investments have been in building LNG facilities over the past few years. However, the company is looking to expand by making investments in other LNG-related infrastructure to improve its market position. One way it's doing that is by developing the Midship pipeline, which will move gas out of the STACK Shale play of Oklahoma. As the country's largest natural gas customer, it's vital that Cheniere has an ample gas supply, which is why it's considering building that pipeline to improve its access to gas. In addition, Cheniere is working with other companies to develop a third regasification site in Chile, so that the country can import more LNG from Cheniere. These investments should enable Cheniere to grow and fortify its LNG business.
Few companies are as focused on LNG as Cheniere Energy, which makes it an ideal LNG stock for investors to consider. While the company's focus does add some additional risk, including the need to secure adequate funding for its projects as well as some exposure to LNG prices, the reward could be well worth it as the company races up the LNG leaderboard.
Tellurian: Building an LNG company from the ground up
Investors won't find Tellurian's (NASDAQ:TELL) name among the world's top LNG producers. That's because the company doesn't produce any LNG at the moment. Instead, it's working to build a fully integrated LNG business from scratch, which includes constructing an LNG terminal, building pipelines, and making direct investments into drilling new gas wells. While its early stage in the process makes it one of the riskiest LNG stocks around, the upside if its plan works gives it the potential to become a millionaire-maker stock.
Tellurian is developing the Driftwood LNG export terminal near Lake Charles, Louisiana. Once complete, the $15.2 billion facility will have the capacity to export 27.6 mtpa of LNG. The project is still in the development stage, with the company hoping to make a final investment decision next year on when it would begin construction. If all goes according to plan, the facility will start operations by 2023.
In addition to that terminal, the company is also working to develop the Tellurian Pipeline Network, which is a series of pipelines costing an estimated $7 billion that would feed gas to the facility. The Driftwood Pipeline is a 96-mile line that would transport 4 billion cubic feet of natural gas per day (Bcf/d) from the nation's existing pipeline network to the Driftwood terminal. In addition, the company is working on several pipelines that would move gas from major supply basins to Driftwood. The Haynesville Global Access Pipeline would be a 200-mile, $1.4 billion line that could transport as much as 2 Bcf/d from the Haynesville Shale toward Driftwood. Meanwhile, the Permian Global Access Pipeline would be a 625-mile line that would move gas from the Permian Basin.
Tellurian also plans to make investments to develop natural gas resources. Last year, the company bought Rockcliff Energy, which owns natural gas reserves in Louisiana's Haynesville Shale.
The company has solid backing for its strategy. Tellurian's Chairman was the CEO and founder of Cheniere Energy while its current CEO was an executive at that company, and it also hired several people away from BG Group after Shell bought that company. Additionally, several major LNG companies have taken equity stakes in Tellurian. Total owns a 19% interest, while the company selected to build Driftwood (Bechtel) and a major equipment supplier (General Electric) have also taken stakes. Those partnerships are a major part of the company's funding plan as its strategy is to sell LNG at a fixed up-front fee to customers, which will enable them to buy it at cost. This approach will allow Tellurian to build Driftwood without taking on too much debt. These financial arrangements also set the company up to produce as much as $2 billion in annual free cash flow upon completing the facility, which is substantial considering that it currently has a valuation of less than $2 billion.
While Tellurian is a risky stock since it's still in the development stage, it has significant upside potential. Because of that, investors need to have a long-term mindset and a high-risk tolerance to consider Tellurian.
The future of LNG is extremely bright
The world's economy needs an increasing supply of fuel in the decades ahead. Due to its abundance and lower carbon emissions, natural gas appears poised to supply a growing share of that demand, with LNG giving it the global access it needs to reach key market centers. That outlook suggests that LNG stocks could do exceptionally well in the coming years as companies benefit from meeting the world's need for this vital fuel.