The Commodity Investor Q&A
With Matt Badiali
January 6, 2010

Q: Your piece about ExxonMobil and its investments in the natural gas arena was excellent. However, I'm surprised you are apparently unaware of the new LNG receiving terminal Joint Venture (JV) that ExxonMobil, ConocoPhillips, and Qatar Petroleum are currently completing at Sabine Pass Texas. – R.F.

A: Thanks, RF. You bring up an important point about where the money's likely to be made in natural gas over the next couple of years...

Two weeks ago, I wrote, "With Exxon's expertise at building LNG [liquefied natural gas] terminals in far-flung places, I'll bet there's a plan afoot to build some here in the States in the not-too-distant future."

As RF correctly points out, the U.S. already has several LNG terminals. But here's the thing: Most of those LNG terminals are receiving. According to the California Energy Commission, we have one export terminal... in Kenai, Alaska.

LNG terminals are like one-way valves. You need specialized equipment to compress gas onto a ship and likewise to return it to gas. Right now, the U.S. cannot ship out its excess natural gas via LNG. That will keep a lid on natural gas prices here at home.

The U.S. has a massive amount of natural gas in storage – 13% above last year and almost 14% above the five-year average.

Normally, gas storage falls by 57 billion cubic feet in November. But November was warmer than normal this year, and we added 9 billion cubic feet to the inventory. We set a new record-high level of 3.84 trillion cubic feet of "working gas" on November 27.

Without a dramatic shift in consumption, the U.S. will be flooded with natural gas next summer.

That is why ExxonMobil, a U.S. oil producer, bought XTO Energy. The company doesn't expect a return on this investment right away. Right now, natural gas is cheap. And Exxon's management believes natural gas will be a major source of fuel... down the road. Exxon's plans typically look out five to 10 years.

Most investors have a hard time planning investments over five to 10 months, let alone years. Unless you're the exception, I don't think you should follow ExxonMobil's lead and buy natural gas stocks here in the U.S.

Right now, there are much better opportunities to invest in natural gas companies outside the U.S. These are companies catering to Asia. Here's what I wrote about Asia's rapacious demand for natural gas in a recent essay for DailyWealth...

Japan and South Korea already consume trillions of cubic feet of imported natural gas per year. India became a net importer in 2004. China became a net importer of natural gas in 2007... and that's not going to change. The country wants natural gas to supply about 7% of its energy needs by 2015. Even if China's energy consumption remained flat (and it won't), it would need to add 5 trillion cubic feet of natural gas from somewhere.

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Last year, there was over $250 billion committed to natural gas projects in Australia and Asia. That's where you can hunt for triple-digit returns.

I believe the next 10 years will mark a dramatic shift from oil to natural gas consumption all over the world. I think it will happen sooner with emerging nations like China and India. It will happen in the U.S. too, but not in the next 12 to 18 months...

My plan for 2010: Stick to natural gas producers abroad.

Good investing,

Matt Badiali