US production expanded once again in 2013 to a new record of 66.5 Bcfd — 20.5% of the global natural gas supply. The US production gains weren’t as great in 2013 as they had been in recent years, and Russia gained some ground on the US in 2013, reaching 58.5 Bcfd. Far behind in third place was Iran at 16.1 Bcfd — good for 4.9% of global gas supplies. Rounding out the top five were Qatar at 15.3 Bcfd and Canada at 15 Bcfd.

The US, Russia, and Iran were also first, second and third, respectively, in natural gas consumption. They consumed, respectively, 71.3 Bcfd, 40 Bcfd, and 15.7 Bcfd. The US and Iran consumed approximately as much gas as they produced (or a bit more), while Russia produced nearly 50% more than it consumed internally. The rest of Russia’s gas is piped primarily to Europe, but China is also slated to become an important consumer. The Russian gas monopoly Gazprom recently signed a $400 billion deal that will have Russia supplying China with natural gas for the next 30 years. In 2013 China was the world’s fourth-largest consumer of natural gas at 15.6 Bcfd. Rounding out the top five among consumers was Japan at 11.3 Bcfd.

While the US was tops in both production and consumption, we are in fifth place for proved global natural gas reserves. (From BP’s definitions: “Proved reserves of natural gas are generally taken to be those quantities that geological and engineering information indicates with reasonable certainty can be recovered in the future from known reservoirs under existing economic and operating conditions.”)

Iran holds the top spot for proved reserves with 1,193 trillion cubic feet (Tcf) — 18.2% of the world’s total proved natural gas reserves. Russia’s 1,104 Tcf is good for 16.8% of global proved reserves, followed by Qatar (872 Tcf), Turkmenistan (617 Tcf) and the US (330 Tcf). At 2013 production rates, the US has 13.6 years of proved reserves, while Russia’s reserves could allow 52 years of production. Because of Iran’s much lower production rate and higher reserves, its proved reserves could theoretically be pumped at the 2013 rate for more than 200 years.

Despite the surge in US natural gas production, US proved reserves have increased substantially over the years. Proved gas reserves in the US reached an all-time high of 334 Tcf in 2011, fell in 2012, but surged in 2013 back to 330 Tcf. The increase in reserves is primarily a function of the pairing of hydraulic fracturing with horizontal drilling, which turned a big volume of natural gas resources into natural gas reserves for the first time. After two decades of declining to flat natural gas reserves, US reserves have now risen 86% since 2000.


Global proved natural gas reserves have grown more consistently than US reserves over the years, albeit not as sharply. Over the past decade global gas reserves are up 33%, and just eked out a new record in 2013 of 6,558 Tcf. This record is a fraction of a percent higher than the previous record in 2011, but global reserves have been effectively flat for the last two years.


The surge in US gas production has had a dampening impact on domestic gas prices, but internationally prices remain high:

With the enormous differentials that have developed over the past five years between US natural gas prices and liquefied natural gas (LNG) prices in Europe and northeast Asia, it is understandable why there is a rush to build LNG export terminals in the US.

As I pointed out in last week’s Energy Letter, US natural gas production is up 11.4 Bcfd in just the past five years. Presently there are 13 pending proposals awaiting approval from the Federal Energy Regulatory Commission (FERC), with a total proposed export capacity of 17.9 Bcfd. Two projects have been approved by FERC. Cheniere Energy (NYSE: LNG) and Sempra Energy (NYSE: SRE) have had projects approved with a combined proposed capacity of 4.46 Bcfd.

Unless US natural gas production continues expanding at the pace of the past five years, it is almost a certainty that these export facilities (among other drivers) will lead to higher US natural gas prices. Higher natural gas prices will create opportunities for natural gas providers as well as companies and partnerships focused on logistics and transport of natural gas — opportunities we regularly focus on in depth in The Energy Strategist.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Updates

Kinder Morgan Earns a Shrug   

Kinder Morgan’s (NYSE: KMI) key operating affiliate and the main source of its income, Kinder Morgan Energy Partners (NYSE: KMP), kicked off the MLP earnings season last week by reporting slightly worse than expected distributable cash flow, providing the expected distribution and pledging to meet or beat its annual operating and financial targets.

Now for the news that apparently mattered more: when asked again on the post-earnings conference call about the possibility of a “transaction to reduce Kinder Morgan’s cost of capital,” shorthand for a long-suggested KMP buyout of its general partner KMI, founder Richard Kinder offered what may qualify as his loudest non-denial yet.

“Let me just say that we’re always exploring operational and strategic opportunities to enhance the value for our investors, including myself. And that includes, among other things, evaluating potential combinations of Kinder Morgan companies. But as I’ve stated in the past, any such transaction or combination would have to be on terms negotiated between the companies and mutually agreed upon,” he said.

A buyout would end KMI’s siphoning off of nearly half of KMP’s cash flow via incentive distribution rights, presumably at the cost of comparable near-term dilution via additional KMP unit issuance. While a merger wouldn’t likely have a major redistributive effect for current KMP cash flow, it would at least ensure that future investments are financed equitably, with all beneficiaries paying the same price via equity issuance and the accumulation of debt.

But a deal like this seems more likely after the May 2017 expiration of warrants that could dilute KMI’s share base by nearly 30%, if they were exercised, which they would be if KMI’s share price topped $40 at that point. If KMI’s price could just bump along in the high 30s until then, providing Kinder and other insiders most of their return via the 4.6% dividend yield until the warrants expired worthless, it would make a subsequent buyout of KMI much more lucrative.

Which brings us back to mundane near-term matters like distributable cash flow. KMP reported distributable cash flow of $1.23 per unit before items, up just a penny from a year ago.

Segment earnings were up $141 million year-over-year, with natural gas transportation delivering more than half the growth, keyed by strong results at Tennessee Gas Pipeline (increasingly a two-way link following recent investment to accommodate the flow of Utica gas to the Gulf coast) as well as last year’s Copano acquisition.

But increased incentive payments to KMI cost an extra $48 million, interest and administrative costs increased by $18 million and sustaining capital spending was $29 million higher. That left distributable cash flow up a modest $56 million year over year, which had to be divvied up among a weighted average of 457 million of limited partner units, up from 413 million a year ago.

So while KMP declared the expected $1.39 per unit distribution representing a 5.3% increase year-over-year and a 6.7% current yield, quarterly distribution coverage declined to 88%. The partnership had always projected a shortfall during the seasonally weaker second and third quarters, and still expects to fully cover its distributions on an annual basis. But Hedgeye’s critical analyst was quick to point out that a year ago the distribution coverage was stronger at 93%.

This mostly reflects last year’s major ramp in capital spending, which has yet to fully pay off given the multi-year nature of many of the biggest projects, even as KMP has already absorbed some of the cost via increased unit issuance, including more than $1 billion in at-the-market equity offerings in the last six months.

There are many reasons to expect these investments to ultimately pay off, including rapidly growing demand for the transportation of natural gas from north to south. Kinder Morgan is bullish on additional near-term opportunities to move the production surge from the Marcellus and the Utica to the Gulf coast for use in new petrochemical complexes there as well as future liquefied natural gas (LNG) export terminals.

Perhaps more importantly for the near term, the recently rebounding unit price of KMP and share price of KMI held firm in the face of the lackluster quarterly accounting, with KMI reaching levels last seen nearly a year ago before Hedgeye began its negative campaign. This despite the fact that short interest in the stock has increased some 75% in that time.

The upshot is that plenty of skeptics remain willing to pay a healthy cost to short this MLP family, but they have seen some of the past year’s gains on this bet reverse sharply since March, and both KMI and KMP have now reclaimed their 50- and 200-day moving averages in a reflection of that recent momentum.

Although the warrants and heavy equity issuance may well cap near-term upside, Kinder Morgan’s assets are undeniably poised to benefit significantly from the longer-term energy trends. Buy KMI below the increased limit of $40.               

— Igor Greenwald