Will Natural Gas Prices Determine the Fate of the US Nuclear Renaissance?

I came across an interesting headline of a premium article with the following content:

The fate of the U.S. nuclear renaissance will be determined more by natural gas prices than the Fukushima Daiichi nuclear disaster, a panel of experts told an industry web conference last week. “I don’t believe the nuclear renaissance is dead, but with natural gas costing $4 to $4.50 per million British thermal units, it is difficult to justify investing in a new-build nuclear plant,” said John Herron, the president, chief executive and chief nuclear officer at Entergy Nuclear, a unit of Entergy Corporation (NYSE:ETR) (New Orleans, Louisiana).

Since this is a premium news article, I did not get to read it in full. However, we all get the message from the brief summary that was presented. If low natural gas prices are indeed attracting the money in the short term, I don’t see a problem at all with nuclear energy in the long run based on 2 reasons:

  1. Sabine Pass, Louisiana
  2. Kitimat, British Columbia

Cheniere Energy Inc. recently won government approval to export liquefied natural gas (super-cooled gas to liquid form) from the majority owned Sabine Pass terminal in Louisiana. Starting in 2015, as much as 803 bcf/year of LNG will be transported on tankers for distribution in overseas markets.

Apache Corporation, EOG Resources Inc. and Encana Corporation jointly own the Kitimat LNG export facility that is expected to come online in 2015 as well with an initial export capacity of 700 MMcf/d (255 bcf/year).

Kitimat LNG terminal

The combined export capacity of both terminals will take increasing volumes of natural gas (>1 Tcf/year) off the domestic market. North American natural gas will evolve from a domestic market with ample supply and limited demand into a global commodity. To get an idea on how exporting will impact natural gas prices, Japanese buyers were paying $14.15 per million British thermal units for Qatari LNG in March, prices at the U.S. benchmark hub in Erath, Louisiana, averaged $4.51 that same month according to Bloomberg.

IEA Projections

Even the IEA does not foresee natural gas eating away from nuclear energy generation. It looks like renewable energy sources will be the biggest winner in the next decade as shown by the following graph:

electricity generation forecasts US

Natural gas will remain a reliable source of energy since renewable (wind/solar) are both intermittent sources of energy.

Final Thoughts

Natural gas prices won’t stay low forever; it’s clear that export facilities will potentially lift natural gas prices to previous highs. On the other hand, I don’t believe we will have to wait until 2015 to see an improvement in natural gas prices. Wood Mackenzie found that 40% of U.S. natural gas produced last year didn’t meet break-even prices for producers and according to Baker Hughes natural gas drilling rigs are down 8% from a year ago. In this post I have not discussed the impact of adopting natural gas as a transportation fuel or the impact from a fraccing ban, even if only on a temporary basis since water cleaning technology will solve this issue.

I believe a great future awaits North American natural gas which is why I want to be invested in it way before 2015. In my opinion, through intermediate dividend paying producers with balanced oil and gas production weighting, one can get an excellent exposure to both oil and gas commodities at the same time since capital can be shifted quickly into either depending on price opportunities.

In conclusion, the US nuclear renaissance will not be determined by natural gas prices simply because prices at this level are not sustainable in the long run especially once domestic production gets access to the international market.

What is your opinion about this ?