Crude oil, ethanol and gold are usually the hot commodities on the investors' circuit, while natural gas (NG) is often neglected. NG, in itself, is a very unexciting commodity - it is colourless, shapeless and odourless. However, NG as an alternate energy source which provides a much more interesting tale. It is an inherently clean-burning fuel that consists mostly of methane. When burnt it produces carbon dioxide - the main culprit behind global warming, emitting a lesser amount than coal and crude oil, however. For this reason, NG is by far the most attractive alternative to its fossil fuel rivals. Solar and wind power are other desirable energy sources, which are in their developmental stages and therefore create a gap to be filled by a more accessible energy source. NG satisfies this transition gap as the cleanest and least environmentally-damaging alternative - no wonder investors and governments worldwide are beginning to acknowledge the full potential of NG.

   Additionally, the ideal energy source needs to not only be cleaner, but cheaper. Recalling last summer, the western world went into a hullabaloo as the price per barrel of crude oil skyrocketed, hitting its high of US$147.27 on July 11, 2008. This translated into chaos for the world economy. The incident sparked a much needed wake-up call that the need for a cheaper energy alternative is urgent.

   A rule of thumb in the energy sector is that the energy equivalent ratio between crude oil and NG is set at 6:1. Translating this, the energy content of a barrel of crude oil is six times that of a British thermal unit (Btu) of NG. As a result, with current fuel prices, NG provides more energy for less money.

   On July 13, 2009 a barrel of crude oil could be purchased at US$59.62, and a Btu of NG at US$3.32. Applying the ratio, NG's energy equivalent per barrel of crude oil equals US$19.92 (US$3.32x6) painting an even more appealing picture of NG as the transitional energy fuel choice.

   Due to the economic recession, global demand for NG has fallen, and as expected, so have prices. Since last year on July 14, 2008, the price of NG per Btu declined 69.55 per cent compared to a 59.04 per cent fall off in crude oil. For the three months ending July 14, 2009, the price of crude oil has trended upwards, increasing 20.70 per cent, while the price of NG has trended downward, falling 16.26 per cent. The price of NG remains depressed and is trading near its ten year low of US$2.

   A few years ago in the United States , the opportunity to take advantage of the cheaper fuel was limited due to the weak supply of NG, making it harder to substitute one fuel for the other. Additionally, NG required, and still requires, extensive infrastructure to produce, transport and use, making the choice of switching less appealing. However, US consumers and investors are now better able to benefit from a price disparity between the fuels due to increased fees for carbon emissions and a newfound supply of NG. According to a report released on June 18, 2009, the US estimated NG reserves jumped 35 per cent, or 542 trillion cubic feet (Tcf) from more than two years ago to 2,074 Tcf. The increase in NG reserves was primarily driven by a new technology that allows producers to drill in shale rocks unlocking substantial amounts of NG.

   With the ability to retrieve NG from places that once weren't possible, the opportunities for the use of NG have grown. This may be a chance for the United States to kill two birds with one stone - using NG to address both environmental concerns as well as the ever-looming energy security issue. The majority of NG used in the USA is produced domestically and is stored in the country's backyard. Texan crude oilman T Boone Pickens has been one of the strongest activists for drastically increasing the percentage of NG used for transportation to reduce the country's dependence on foreign crude oil. Currently, only about one tenth of one per cent of natural gas consumption is used for transportation. The latest response to the NG initiative by the government was seen on July 8, 2009 as US lawmakers unveiled legislation geared towards providing a tax credit for those purchasing natural gas vehicles (NGV) and installing NG refueling stations.

   On the local side, the Government of Jamaica (GOJ) has recognised the benefits of turning to a cheaper and cleaner energy alternative for some years now. In 2004 the GOJ finalised an agreement with the Government of Trinidad & Tobago to purchase 1.1 million tonnes of liquefied natural gas (LNG) over 20 years that was set to commence in 2009. LNG will be used by the island's alumina refineries and the Jamaica Public Service Company in an effort to reduce costs and stimulate investment in the alumina sector. This foresight by the GOJ is expected to result in economical and environmental benefits, particularly as refineries battle with exorbitant input costs and low demand.

   In the long run, as consumer demand increases, the potential for NG as an alternate energy source is tremendous. In the past few months investors have become more aggressive in holding a position in NG, through commodity exchange traded funds (ETFs). The biggest natural gas ETF is the United States Natural Gas Fund (UNG) which has seen its average trading volume leap to 45 million shares at day's end yesterday, up from four million shares at the end of March 2008. Due to its high demand, UNG increased its number of shares outstanding by more than 10 times the total at the start of the year. UNG is seen as a gauge of natural gas prices, so investors should keep it on their radar.

By Juvenne Yee (Research Analyst at Stocks & Securities Ltd. – Jamaica)

Jamaica Observer

July 15, 2009