Tourmaline Oil Corporation
A play on AI and Geopolitics!
In 2023, about 4.18 trillion kWh of electricity were generated at utility-scale electricity generation facilities in the United States. Out of this natural gas had a 43% share! For reasons we will discuss below, natural gas is cleaner than many other fossil fuels and is known as a ‘transition’ fuel.
Due to AI, longer term, power demand from IT equipment in U.S. data centers is expected to reach more than 50 gigawatts (GW) by 2030, up from 21 GW in 2023, according to consulting firm McKinsey's latest estimates. We have to assume that natural gas will play a very important role in US electricity mix and base load demand for a long long time. If it only maintains its share of the overall mix then we are potentially looking at mid to high single digit growth in natural gas demand for power generation!
In addition, record amounts of LNG capacity is coming online in North America over 2024-2028. With Russia out of the picture in Europe, North American gas is required to fuel Europe and Asia. The U.S. has seen a substantial increase in LNG export capacity due to the construction and expansion of several LNG terminals along the Gulf Coast and other coastal regions. After this, like oil, perhaps gas will become a global commodity with global pricing.
But here is the long term chart of natural gas prices:
Did traders not get the memo?
We believe that the current depressed price of natural gas is temporary and a direct result of weak seasonal demand. Over the medium and long term, power generation and LNG are strong and durable structural forces that will propel demand and price of natural gas up and to the right.
We have written extensively about oil and gas in the past. In this report, we will do a deep dive into the dynamics of LNG and then delve into Tourmaline as our preferred way to play the natural gas thesis.
LNG
Liquefied natural gas (LNG) refers to natural gas that has undergone a cooling process, reducing it to a liquid state at approximately -260° Fahrenheit (or around -162 Celsius), facilitating its shipment and storage. When in its liquid form, the volume of natural gas is about 600 times smaller than its volume as a gas. This transformation process is known as liquefaction. LNG is stored and transported via specialized vessels across oceans to designated receiving terminals responsible for storing the liquid LNG. Subsequently, it is directed to re-gasification facilities, where it is converted back into its gaseous state, enabling it to be transported to end users through pipelines. This entire procedure allows for the transportation of gas to locations lacking pipeline infrastructure, greatly enhancing the marketability and mobility of natural gas.
Advantages of LNG
LNG or natural gas as this is what the final end product is, has multiple advantages. They are listed below
When natural gas is burned, it produces fewer pollutants and greenhouse gases than gasoline or diesel. The combustion of natural gas results in significantly lower emissions of CO2, NOx, and SO2, and almost no ash or particulates, which are tiny, harmful components of air pollution that can deeply penetrate the lungs. Additionally, natural gas evaporates quickly when exposed to the air, leaving no residue on water or soil. These environmental benefits, in a world which wants to decarbonize, makes natural gas/LNG a preferred choice over crude oil or coal.
Natural gas is well-suited for Combined heat and power (CHP) systems, also known as cogeneration, which allow simultaneous production of electricity and useful heat from the same energy source. Natural gas power plants often have higher thermal efficiency, which means they can convert a larger portion of the fuel's energy into electricity. Combined cycle power plants use both gas and steam turbines, further enhancing overall efficiency.
LNG has the capability to be stored for prolonged periods, ensuring a consistent energy supply. This feature renders it valuable for addressing peak power requirements and serving as a contingency energy source during disruptions in other energy provisions. Typical peak demand times may coincide with sweltering summer days or chilly winter days. Typically, peak power needs arise during the afternoon when businesses are at their busiest and in the evenings when household appliances are in operation. In such scenarios, natural gas power plants are frequently employed as peaker power facilities due to their dispatchable nature, allowing for rapid activation, deactivation, and swift output adjustments.
“Natural gas is the best way to back that up in any scenario. When the wind's not blowing and the sun's not shining, you can bring natural gas turbines on to generate power within a matter of minutes, and you can store natural gas underground through existing reservoirs that we already have to give you that long-term sustained months of storage for energy needs that you might have.”
-Former Senior Engineer, Kinder Morgan, August 2023 (Alphasense Expert Call)1
Last but not the least, natural gas transformed into LNG can be transported to areas where natural gas is not abundant. This has benefits for the producer as it finds a buyer while the receiver gets access to a reliable base load fuel source, which is consistent compared to solar or wind energy. The receivers of LNG can also save their capital on building gas related infrastructure where the economics are not attractive due to insufficient supply, inconsistent demand, troublesome regulations and financing issues
Because of the aforementioned benefits of cleanliness, efficiency, consistency and most importantly, transportability, has brought LNG to limelight in recent years. Following the Russia/Ukraine conflict, and in light of Europe's efforts to reduce its dependence on Russian gas, there has been a surge in demand for LNG.
LNG infrastructure
The LNG value chain begins with the extraction of natural gas from underground reservoirs. After extraction, this gas, often called ‘feed gas’, must be sent to a processing facility for treatment prior to liquefaction. Upon the removal of impurities and liquids, the natural gas is ready for the liquefaction process. In the liquefaction facility, natural gas is transformed into a liquid state at atmospheric pressure through a cooling process, bringing it to a temperature of -260° Fahrenheit (or around -162 Celsius). Liquefaction plants are commonly organized with several parallel processing units, known as "trains." While each train functions as a self-contained processing unit, it's typical to have multiple trains constructed alongside one another.
Liquefaction is often the costliest part within the value chain. In response to environmental concerns and the remote offshore locations of resources, floating liquefaction solutions have been introduced. With floating liquefaction, all processes take place on the sea-based vessel. While the underlying liquefaction principles remain similar, the maritime setting and space constraints on the vessel necessitate somewhat different technological solutions.
After natural gas has been transformed into its liquid form, it is ready to be transported to specialized LNG ships or carriers with regasification facilities as the final destination. When LNG ships reach the terminals, the LNG is reverted to its initial gaseous state through a controlled increase in temperature. Typically, regasification takes place at an onshore import terminal, which encompasses docking facilities for the LNG carrier, one or more cryogenic storage tanks to hold the LNG until regasification capacity is accessible, and a regasification plant. Subsequently, the re-gasified natural gas is directed to its ultimate consumers, which may include power stations or transmission through pipelines. Figure 1 depicts the typical LNG cycle.
Figure 1: Full-cycle representation of LNG process2
LNG Demand/Supply
LNG demand is expected to grow robustly as shown in Figure 2.
Figure 2: Global LNG supply vs demand forecast range4
Shell’s latest LNG outlook4 which is Shell’s interpretation of data from Wood Mackenzie, Poten & Partners, IEA, S&P Global Commodity Insights, all leading energy consulting firms. Based on the figure, close to 200 MTPA (26 bcf/d) of LNG supply will come online in the next few years. However, the current demand forecast range still comfortably exceeds the overall supply with a gap of around 150-225 MTPA (19-30 Bcf/d). For context, the biggest LNG producers, Australia, Qatar and US produce approximately 11 Bcf/d each today. Therefore, a demand range between 19-30 Bcf/d till 2040 leaves plenty of room for new investment and production to come in with profitable economics.
The biggest LNG exporters globally include countries like USA, Qatar, Australia, Russia and Malaysia. Collectively, the market share of these five countries amounted to 78% in 2022.
Here is some further information on some major players: