LNG Keeps Growing

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Conflict in the Middle East invariably leads to concern about disruption to crude supplies that pass through the Strait of Hormuz. Oil prices duly rose once Israel launched its surprise attack on Iran. Around 20% of total oil consumption comes through this narrow waterway. It’s unlikely Iran could close it for long if at all.  

Sell side firms have estimated that the market’s assessed probability of a closure is around 15-20%, based on comparing the recent move up in crude versus where it would go if a fifth of global supplies were stopped. Crude is up about 20% this month. 

Around 20% of the world’s Liquefied Natural Gas (LNG) also passes through the same bottleneck. Nonetheless, the reaction of regional LNG benchmarks in Asia and Europe, where most imports go, has been muted, with prices rising around 3% this month. 

Maritime insurance rates have gone up, and ships are being asked to arrive at export terminals in the Arabian Gulf only when called to minimize the number of vessels concentrated together.  

Although 20% of oil and LNG pass through the Strait, LNG is only 14% of global gas consumption. This explains the difference in market response to the Israel-Iran war, since only 3% of the world’s gas is at risk.  

Oil is easier to move than gas, so around 40% of the world’s oil is traded before being refined. Because natural gas isn’t very energy-dense, its volume has to be significantly condensed to make movement by ship commercially attractive.  

Twenty five years ago the trade in gas via inter-regional pipelines was more than 2.5X as big as LNG. Pipeline volumes peaked just prior to the pandemic when they fell 10%. A brief rebound in 2021 ended with Russia’s 2022 invasion of Ukraine. By 2023 pipeline gas volumes were 24% lower than in 2019. The loss of Russian gas exports to the EU was the proximate cause.  

By contrast, LNG volumes have climbed steadily, and didn’t even drop in 2020. Energy security became more important following the Russian invasion. A pipeline connecting two countries doesn’t allow any flexibility if relations between the supplier and buyer break down. This was the case with Nordstream before it was mysteriously blown up. China and Russia have been negotiating for years over additional Russian gas supply via the Power of Siberia 2 pipeline, with China showing less urgency than Russia to reach an agreement.  

Both countries must consider how they’d cope if a dispute caused flows to stop. A Russian adviser suggested that Middle East tensions would spur an agreement so that China could reduce its exposure to the Strait of Hormuz, although this looks like wishful thinking.  

LNG trade is around 40% bigger than inter-regional pipeline volumes, and that gap is likely to grow. Moving natural gas by ship allows trade between countries too far apart to be connected via a pipeline. LNG also enhances energy security for both parties, since once the necessary infrastructure is in place, both buyer and seller can negotiate agreements with multiple counterparties.  

We often note the projected growth in US LNG export capacity, driven by abundant domestic supply. The Asian JKM benchmark is $13.80 per Million BTUs (MMBTUs), and the European TTF is $13.25 per MMBTU. With US natural gas at around $4, the price differences are easily big enough to make US exports attractive.  

Our current LNG exports of around 15 Billion Cubic Feet per Day (BCF/D) are limited by liquefaction capacity. We expect this to roughly double by 2030 based on projects already under construction.  

There are many other projects that have not yet reached Final Investment Decision (FID), so export capacity is likely to continue growing into the next decade.  

The US is the world’s biggest LNG exporter with 21% of the market but is not alone in growing. Around half of the “aspirational” capacity as estimated in the International Gas Union’s 2025 World LNG Report is outside North America.  

China is 19% of LNG imports, followed by Japan at 16%. Global LNG trade has grown at 6% pa since 2000. 

Because there will be more LNG available, some analysts predict this will lead to a global surplus that will depress prices and profitability for exporters. However, receiving capacity is also growing. The facilities that regassify LNG for injection into their distribution networks are more numerous than the liquefaction export terminals. They generally operate at around 40% capacity,  

By contrast, global liquefaction facilities operated at 87% of capacity last year. There’s more than 2X as much import capability as export. The world is preparing to use more natural gas, as the unmet promises of renewables mount up. For example, Malaysia just announced a 50% increase in gas-fired electricity to meet rising demand from data centers.  

LNG exports will be part of the solution.  

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

US Midstream Is Far From Conflict

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To trade the daily moves in the market is to be an armchair strategist. JPMorgan estimates the crude oil market reflects a 17% probability of a worst-case supply disruption out of the Middle East. Presumably an oil spike would hasten the war’s conclusion via US pressure on Israel.

So Israel’s attacks on energy infrastructure are focused on disrupting Iran’s domestic supplies. Therefore, Iran must have an incentive to impede flows. Perhaps their military capabilities have already been too degraded to provide this option. Or maybe this country with few friends in the region doesn’t wish to further alienate its neighbors.

Will there be a ceasefire? Or will the US use bunker-busting GBU-37 bombs each weighing 30,000 pounds to wipe out Iran’s nuclear capability? To us it seems that the opportunity to destroy the Fordo nuclear site will never be as good as it is now. Few of Iran’s neighbors would be sorry to see the theocracy finally denied the capability to make a nuclear weapon. Trump has promised the world something better than a ceasefire. This would seem to check the box.

But it’s hard to make a confident forecast. The worst case for energy supplies is not the most likely outcome but would cause sharply higher prices. In that regard, midstream companies provide some optionality.

Consequently, the news affecting midstream has been in North America, and therefore drawing less attention than Israel’s pummeling of its long-time adversary.

Last week the Ohio Power Siting Board approved the 200MW Socrates South Power Generation Project. Will-Power, a subsidiary of Williams Companies (WMB), will develop two power plants that will run on natural gas provided by WMB. This is an example of the behind-the-meter (BTM) solution to providing electricity to data centers without impacting residential customers.

WMB as well as other large natural gas companies such as Energy Transfer have been promising BTM solutions to meet the needs of data centers for rapid increases in electricity. Meta will be the main customer of the Socrates project. It is expected to be operational by 2H26, fast by the standards of new power generation. Ohio’s electricity customers won’t be adversely affected.

In an example of what happens when data centers boost demand, residents of New Jersey and other neighboring states that are part of the PJM Interconnection grid system are now paying higher prices for electricity. It’s complicated to assign blame. PJM says 70% of the recent increase in demand is attributable to data centers.

But supply is down too. In 2023 New Jersey’s Democrat governor Phil Murphy mandated that the state cease all hydrocarbon-based power generation by 2035. The state’s last two coal-fired power plants were shuttered in 2022. Windpower has come up short, with Danish firm Orsted abandoning two offshore projects because they became too costly.

Liberals say not enough renewable supply is being added, but they’ve lost credibility on energy policy.

This is exactly the problem that BTM is supposed to avoid. Across the region covered by PJM, data centers are driving up power prices for everyone.

Worried about Democrats being blamed by voters for a big jump in electricity prices when they vote for governor in November, Murphy has announced subsidies for household utility bills.

Democrat energy policies are to blame.

Clean energy stocks dropped sharply yesterday as it became clear that the Senate tax package would immediately end most tax breaks for wind, solar and EVs. Given the lead- times involved and reliance on tax credits, it’s likely that swathes of the renewable energy business in the US will be permanently impaired. The electoral cycle is shorter than their investment cycle, leaving any proposed project at risk.

Renewables have been a lousy investment. The S&P Global Clean Energy Index has returned just 3% pa over the past five years. The American Energy Independence Index has returned 27% pa over the same period.

EVs are losing attraction in western countries. A recent survey carried out by Shell found that only 31% of US owners of conventional cars were interested in switching to an EV, down from 34% last year. The slow rollout of charging infrastructure under the last administration didn’t help, and it’s unlikely to change now. In Europe, interest in switching to an EV fell to 41% from 48%.

EVs continue to gain adherents in China, which is supporting their coal consumption since this provides 80% of electricity generation in China. Progressives who cite China’s EV leadership as evidence of their commitment to reducing greenhouse gas emissions need reminding of this regularly.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

 

Strengthening Your Portfolio With Pipelines

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When conflict occurs that might disrupt global oil supplies, portfolios that include an allocation to midstream energy infrastructure usually enjoy some modest protection. Crude traded up 14% on Thursday night as the Israeli attack unfolded. Some opportunistic hedging by producers trimmed those gains during the day. Energy stocks as usual responded positively.

The effect on midstream is more subtle. The sector is less responsive to commodity prices than in the past. It may enjoy a brief lift as positive energy sentiment spills over, but management teams don’t generally obsess too much about oil. This time may be different, because weak crude prices have constrained US oil production with some even forecasting it may drop next year. Friday’s higher prices benefitted Oneok and Plains All American, which might see more robust volumes through their systems if higher prices persist.

Crude weakness this year has also curbed inflation expectations. The partial reversal explains Friday’s weakness in bonds. According to Wells Fargo, around half the midstream sector’s EBITDA is tied to contracts that allow price hikes linked to the PPI. In 2022 this was a significant benefit since midstream companies were able to raise prices in line with inflation. This supported the sector’s 22% return that year, a sharp contrast with the S&P500’s -18% return as the Fed tightened rates.

On Friday, midstream outperformed the S&P500 by 1.5%. But the diversification benefits of midstream last for more than a couple of days. Most investors have significant technology exposure, since it’s now almost a third of the S&P500. Several articles have been written about the evolution of the market’s leading index towards a basket of growth stocks.

Midstream energy infrastructure, defined here as the The American Energy Independence Index (AEITR), is less correlated with most S&P500 sectors than is the Technology sector. The two sectors where this is significantly not the case are the energy sector itself and financials. It has only half the correlation to the S&P500 as Technology, unsurprisingly given the shifting composition of the index. But for Communication Services, Consumer Discretionary and Healthcare the AEITR is also less correlated to these sectors than is the Technology sector.

It also doesn’t hurt that when markets are considering whether Israel will strike Iran’s energy infrastructure, the AEITR is all in North America well out of harm’s way. The Strait of Hormuz is widely recognized as a chokepoint for Middle East oil exports. Less attention is paid to the vulnerability of trade in Liquefied Natural Gas (LNG), 20% of which passes through the same stretch of water from Qatar and the UAE.

Last year Qatar exported 80 million metric tons of LNG, making them the third biggest exporter behind the US and Australia, with 19% of global trade. 70% of Qatar’s exports go to Europe and 20% to Asia. We were surprised that so far neither of the regional LNG benchmarks have responded much to the same concerns that have boosted oil prices, even though buyers have limited alternatives.

US LNG exports don’t face the risk of a Middle East war disrupting supplies. We think that the reliability of the US as a supplier could become more highly valued as buyers contemplate worst case scenarios for the product.

We still see attractive opportunities among LNG stocks.

Venture Global received a boost last week when they withdrew their application to build the Delta LNG terminal, because they believe they can achieve an equivalent capacity increase by expanding their Plaquemines facility. VG has earned the respect of many for their relatively fast project execution.

NextDecade announced that they have reached agreement with Bechtel Energy to build Trains 4 and 5 of their Rio Grande LNG terminal. We think it’s possible that NEXT will make a Final Investment Decision (FID) to go ahead with this second stage before the end of the year.

Israel halted production at its Leviathan natural gas field, operated by Chevron, due to security concerns. Within hours Egypt, which depends on gas imports, began shutting factories.

Russia’s invasion of Ukraine made energy security a higher priority. The war in the Middle East will likely add to that. We continue to think that US LNG exports will be highly valued by America’s friends and allies around the world.

For many investors, midstream appeals because of the stable dividends well covered by cashflow and declining leverage. Few consider the diversification benefits of an allocation or the sector’s resilience to disrupted energy supplies. The events of recent days have highlighted these additional positive features.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

 

The Ethane Standoff

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All over the world plastics are manufactured using derivatives of crude oil. Along with cement, steel and fertilizer these are what Vaclav Smil refers to as the four pillars of civilization. Modern life couldn’t exist without them. Renewables are largely irrelevant to their production. Anybody who studies how we use hydrocarbons must conclude, as we have, that they are irreplaceable.

The American shale revolution (and it is uniquely American) unleashed new supplies of oil, gas and Natural Gas Liquids (NGLs). Methane, or natural gas, is the simplest hydrocarbon with a chemical formula of CH4, combining a single carbon atom with four of hydrogen.

Where pure methane is extracted it’s called “dry gas”. It’s often found with other more complex hydrocarbons referred to as NGLs, as in the Marcellus shale in Appalachia. This is “wet gas.” Most of our ethane is now produced in the Permian in west Texas and New Mexico where it is part of the “associated gas” that comes up with crude oil.

Midstream companies separate out the individual NGLs because they’re more valuable, and in most cases can’t be left in the natural gas supplied to customers. Therefore, wet gas is generally more lucrative than dry gas. Ethane (C2H6) is the is the exception – if the price of ethane is low enough it may not be worth separating out and can remain around 10% of the gas we use for cooking, heating and power generation. This is called ethane rejection.

In recent years the US has become the global leader in ethane production. Its relative abundance here keeps the price around one third of most other industrial nations. The US petrochemical industry has grown its consumption of ethane as it’s become more available. While in most of the world plastic is manufactured using a crude oil derivative, in the US ethane is converted into ethylene and used to make plastics, chemicals and other synthetic materials.

US ethane production has tripled over the past decade, to around three Million Barrels per Day (MMB/D). Quantities of NGLs including ethane are typically measured using the energy equivalent of crude oil even though ethane is a gas and is handled like one. A “barrel” of ethane means a quantity containing 5.8 Million BTUs, the same amount of energy in a barrel of crude.

Last year US ethane exports averaged 0.49 MMB/D. China bought 46%, with Canada, India and Norway buying most of the balance. No other country exports ethane on large ships, called Very Large Ethane Carriers (VLECs). China gets virtually all its ethane from the US. Energy Transfer (ET), Enterprise Products Partners (EPD) and Targa Resources (TRGP) own the export infrastructure that facilitates ethane exports. All expect growth and have additional capacity.

Which brings us to tariffs.

Following Liberation Day in early April, investors worried that the 145% tariffs imposed by the US on China would lead to reciprocal tariffs on US exports, including ethane. However, China recognized that its petrochemical facilities set up to process ethane had no alternative supply and chose to exempt US ethane imports.

For a few weeks, this seemed to solve the problem. But last week ET disclosed that the US government had told it to obtain an export license before shipping ethane to China. EPD said they expected their request for emergency authorization to be denied, affecting three cargoes.

On the weekend there were at least seven ships loaded with ethane waiting near the Gulf coast for US approval to sail to China. For now, neither country has any obvious alternative to trading ethane with one another.

ET, EPD and TRGP, the midstream companies with the most exposure to ethane exports, all lagged the sector following April 2, although ET has since rebounded. None of them report ethane revenues separately. They include it within NGLs, which last year were around 25% (ET) and 40% (EPD) of revenues. Most of this activity was domestic so exports were a small portion. TRGP separates out NGL storage, terminaling and export, which was 3% of total revenues.

There are no winners from the disruption of US-China ethane trade. We think it’ll be resolved soon, perhaps as part of the bilateral talks currently taking place in London.

I’ll close by providing a chart of US energy production by source since 2010. We’ve added 17.4 Quadrillion BTUs (“Quads”) of natural gas and 2.25 Quads of solar plus wind, which were combined into a single category on the chart to render them visible. America’s most important energy story continues to be The Natural Gas Energy Transition.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

 

 

 

Gas Exporters Keep Growing

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Venture Global (VG) continued its post-IPO recovery last week. Back in January price talk was above $50 which would have valued the company at double market leader Cheniere. Pushback from institutional investors reduced the IPO price to $25, but it quickly sank below this (see Nothing Ventured, Nothing Gained).

VG has earned a reputation for fast construction of LNG terminals using a modular approach. They’ve also been willing to antagonize big customers. When European LNG prices spiked in 2022 following Russia’s invasion of Ukraine, VG held off making contracted deliveries so they could take advantage of the suddenly high prices themselves. S&P Global estimates this netted them windfall profits of $3.5BN, which their contracted buyers including Shell and BP believe should have been theirs.

VG was contracted to start LNG deliveries once Calcasieu Pass LNG was “commissioned” (fully operational). The parties have different interpretations of what this means, and the dispute has gone to arbitration. The downside case for VG is they have to pay $3.5BN. Future LNG buyers are likely to negotiate quite carefully with them. TotalEnergies has said they don’t want to do business with them.

VG is looking like another Energy Transfer – a combative approach to business combined with great execution.

Regular readers know we like exposure to America’s growing LNG story, but we initially avoided VG because we thought it was overpriced. We later took a small position.

Last week FERC gave final approval to VG’s third export facility, CP2 LNG. The company announced that construction would begin immediately. VG and Cheniere are competing to be the biggest US exporter. As each company makes a new announcement, they leapfrog the other.

Once completed, CP2’s 28 Million Tons per Annum (MTPA) will take VG’s total capacity to 66.5 MTPA. The company expects it to begin operations in 2027. Whether contracted buyers actually take delivery will depend on the strength of their contracts and whether geopolitical events have created a lucrative spot market.

Cheniere’s current capacity is 46 MTPA with another 8 MTPA under construction. CEO Jack Fusco has said the company plans to double its capacity by expanding their existing facilities at Sabine Pass and Corpus Christi on the Texas gulf coast.

Between the two companies, they plan to have capacity of almost 19 Billion Cubic feet per Day (BCF/D)

US natural gas production averaged 113 BCF/D last year, with LNG exports taking 12 BCF/D. Cheniere was around half of that. The US Energy Information Administration (EIA) expects 14.2 BCF/D of exports this year. At last year’s rate European buyers will account for three quarters of this.

The US is the world’s biggest LNG exporter and looks likely to stay that way.

Given the increasing demand from export terminals as well as data centers, US natural gas prices are likely to move higher over the next couple of years.

The power needs of data centers are about to become a political issue. PJM Interconnection, which operates the country’s largest grid across a swathe of the eastern US extending from Illinois, expects costs to rise by $9.4BN. This has been blamed on new data centers by PJM’s watchdog. Much of this is attributed to Virginia and Maryland, where data centers proliferate.

Brian George, who leads global energy market development and policy at Google, conceded that, “We are now imposing a significant cost on the system.”

New Jersey’s Democrat governor Phil Murphy has announced a $430 million initiative to subsidize bills for poorer households. Your blogger lives in New Jersey, doesn’t like Phil Murphy and doesn’t expect to receive a reduced electricity bill. However, the increased demand for natural gas is welcome.

Tier 4 data centers have an expected uptime of 99.995%, which equates to about 26 minutes of downtime annually. According to Morgan Stanley, Bill Schweber, an electronics engineer, wrote for EE Times that AI data centers require 99.99999% uptime, which equates to being down only 3 seconds a year.

Renewables are entirely inadequate in this regard. The hyperscalers building data centers are quickly compromising their green energy goals. Because combined cycle natural gas turbines have a backlog of as much as five years, smaller single cycle turbines are being snapped up. These are less efficient, but there’s a scramble for electricity.

Congressional support for solar and wind is crumbling as the 1BBB makes its way through the Senate. Some Republican legislators from states benefitting from tax credits in the Inflation Reduction Act (IRA) have been pushing back against plans to cut or eliminate them. But a  Politico Energy podcast reported last week that Senator James Lankford (R-OK) from a windy state thinks they need more reliable energy such as natural gas to provide baseload power and meet the needs of data centers.

Gas demand continues to grow.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

Did Ukraine Boost Oil Prices?

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Macro issues are driving the market even more than usual. Pipeline earnings came with barely a ripple as companies once again generally hit or modestly exceeded guidance. Crude oil rose on Monday on news that OPEC+ was planning a smaller than expected increase in output. This coincided with Ukraine’s spectacular attack on four Russian air bases deep inside the country.

Although seemingly unrelated this makes a cease fire, which was already poor odds, unlikely. The Russian military response could lead to escalation. Correspondingly, increased US sanctions on Russia are now more likely. US Senator Lindsey Graham is pushing a bill that he says has at least 82 votes.

Some oil traders may be considering a further drop in Russian exports. Their crude oil mostly goes to China and India, but Turkey and Brazil are big buyers of their refined products.

Equity markets are increasingly inured to new tariff announcements. The new 50% steel tariff also announced over the weekend had little discernible impact, because we’ve learned to expect that tariff announcements are soon rolled back. Energy analyst John Kemp noted that speculators are favoring long positions in refined products rather than crude, betting on little tariff harm to global GDP growth. The thirty year treasury bond yield moved above 5%, reflecting little concern about slowing growth but more about our fiscal outlook.

5% is a paltry return for the risk.

Last month the FT’s Robert Armstrong christened this the TACO trade (Trump Always Chickens Out). Our Negotiator-in-Chief is now aware of this assessment and not happy about it. A White House tariff announcement that references tacos would not be good.

Supreme Court rulings rarely have a direct impact on the pipeline sector, but last week SCOTUS voted 8-0 (one justice recused herself) to limit the scope of environmental reviews that federal agencies take when approving projects.

This is a welcome turnaround following years of lower courts demanding that permits for a new pipeline or LNG export terminal consider the Greenhouse Gas (GHGs) emissions from the combustion of their transported product by the end user. This always struck me as a political view disguised as a regulatory policy.

Natural gas has displaced coal in the US, reducing GHGs to everyone’s benefit. Climate extremists have persuaded the courts that a blocked gas project means less gas consumed and reduced emissions.

There’s no evidence to support this, and in many cases it’s simply unknowable what would be the impact on, say, South Korean energy consumption in five years if an LNG export terminal that would have sent them US gas is never built.

The unexported gas would probably still be consumed domestically, and South Korea might buy gas from another supplier or rely on coal which provides 33% of their electricity and is growing. The US is only 16% coal.

The January 2024 Biden LNG Permit Pause that Trump rescinded on his first day in office was based on the dubious assumption that constraining LNG exports it would reduce emissions. The Supreme Court ruling at least means that left wing politics will have less impact on energy infrastructure, to everyone’s benefit including pipeline investors.

The Sierra Club and their motley crew have weaponized the courts by raising often trivial legal objections and finding a sympathetic judge. NextDecade (NEXT) was impacted by this last summer (see Sierra Club Shoots Itself In The Foot) when a DC circuit court sent a previously granted permit back to FERC for further review.

NEXT told us they were very happy with the recent Supreme Court ruling and are cautiously optimistic that it would help as they plan further expansion of their Rio Grande terminal.

The DC circuit court had cited concerns about “environmental justice” which in this case meant some nearby residents would have an impaired view. Climate extremists opposed to reliable energy have learned how to exploit subjective concerns in court.

NEXT thinks that the SCOTUS ruling will limit the scope of the environmental considerations a Federal agency may include. The reduced legal uncertainty will help future projects and perhaps at the margin even lower the cost of capital. This story didn’t grab headlines but was a positive one for our sector.

Lastly, the WSJ published AI Is Learning to Escape Human Control which described a model that rewrote some of its own code to disable the shutdown command that its creators had inserted. The model also wrote self-replicating malware, and left messages for future versions of itself about evading human control.

The story reminded me of the “gain of function” virus research that was being conducted in the Chinese lab in Wuhan, from which the overwhelming evidence suggests the Covid virus originated. Let’s hope there’s no analogy in the future.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

The World’s Only Shale Revolution

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In conversations with investors the Shale Revolution is acknowledged as driving US hydrocarbon production up. What is less appreciated is how much this has been a US phenomenon, with no equal anywhere else in the world.

The technologies of hydraulic fracturing (“fracking”) and horizontal drilling were developed sufficiently that they allowed access to enormous reserves that were otherwise out of reach. Although such geological formations are not unique to America, nowhere else has been able to harness all the other requirements necessary for exploitation.

Least appreciated is privately owned mineral rights. Americans take for granted that a gusher of oil on their property will make them rich. But in the rest of the world the government takes ownership – even in the UK, upon whose legal system the US is based.

This has enabled private landowners to negotiate deals with Exploration and Production (E&P) companies. The activity is regulated and taxed by the state and provides royalties to the landowner. I’ve chatted with beneficiaries of this common arrangement, and they typically report that oil or gas production takes up a tiny portion of their land. Drilling a well is noisy and disruptive but once completed there’s not much further impact.

The US has other advantages, including a highly skilled energy labor force, a culture of entrepreneurialism, technological excellence and the world’s deepest capital markets. We also have ample supplies of water. It’s estimated that fracking the typical well requires around 4 million gallons.

These are all the reasons Why the Shale Revolution Could Only Happen in America as we explained in a 2016 blog post.

It wasn’t always good for investors. The opportunities for increased production drew too much capital, and the damage from the subsequent crash hung over the sector for years. The fear of stranded assets kept many away from traditional energy. A nascent recovery in 2019 was crushed by lockdowns during the pandemic, a low point in public health policy that wrongly imprisoned everyone in their homes instead of just the most vulnerable.

Because many investors are unaware of how uniquely American the Shale Revolution is, they also don’t appreciate how much it has impacted global energy markets. In 2014 OPEC saw the threat posed by US shale and pushed oil prices down in an effort to bankrupt these new market entrants. Within 18 months crude fell from $100 per barrel to $25.

Although there was widespread financial pain, the move was too late. Over time giants like Exxon and Chevron moved in, bringing financial heft and technological expertise that lowered costs. US shale was here to stay.

The global impact shows up on production charts covering the last quarter century.

In crude oil, the US is responsible for 53% of the growth in production since 2000. In natural gas we’re 31%. In Natural Gas Liquids (NGLs, which include ethane, propane and butane) the US is 47% of global production and 60% of the growth over this time.

We produce a quarter of the world’s natural gas and are the biggest exporter of Liquefied Natural Gas (LNG).

The result is that increased US production of hydrocarbons is the biggest energy story in the world. Without it, most manufactured goods would be more expensive because transportation (oil), plastics (ethane or crude oil) and power (electricity from natural gas) would all cost more. Lower prices have boosted living standards everywhere.

While America is the world’s biggest energy story, natural gas is the biggest energy story in America. US media relentlessly covers the energy transition towards renewables, ignoring the fact that natural gas production has increased at eight times the rate of solar and wind over multiple time periods extending back 25 years.

The Natural Gas Energy Transition, as we explained last year, is the only energy transition of any consequence going on in the US. It’s protected us from the disastrous energy policies of Europe (see Germany’s Costly Climate Leadership).

Which naturally brings us to midstream energy infrastructure, the enabler of the world’s biggest energy story. Gas demand from power hungry data centers and LNG export terminals underpin growth. Valuations are not as cheap as two years ago but by no means expensive. And energy is the president’s favorite sector, with many countries advised to avoid high tariffs on their US exports through buying more of our oil and gas.

Fund flows show that retail investors have only recently become net buyers of the sector, which should comfort those wary of being late to follow the crowd.

Explaining to investors why America is the world’s biggest energy story invariably grabs their interest.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

Investors Warm To Gas Exposure

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The mood was reportedly upbeat at the 22nd Annual Energy Infrastructure CEO & Investor Conference (known as the EIC) in Aventura, FL last week. Performance has been good. The American Energy Independence Index, which reflects the overall industry, has a five year trailing return of 27% pa, easily beating the S&P500’s 16%.

Management teams provided plenty to support an optimistic outlook. The election brought a welcome reset of government policy towards reliable energy. One of the president’s first moves was to lift the poorly conceived ban on new LNG export terminals. Energy Secretary Chris Wright has a background in oil and gas, having founded Liberty Energy. Among the many sensible policies being embraced is support for nuclear energy. President Trump signed an executive order intended to boost nuclear, although actual progress will require a rethink of the current approval process.

The opposition of the Sierra Club and the rest of their left-wing climate cohort to nuclear energy has always betrayed a desire to impoverish humanity with mandatory solar and wind. Their irrelevance to public policy is to everyone’s benefit.

Ignoring that wretched little girl Greta and the rest of the Progressives can be hard, but it’s worth the effort.

Natural gas demand was a big topic of conversation at the EIC. This is coming from data centers and LNG exports. Energy Transfer seems to report more interest every week – the company reports discussions covering gas supply to up to 150 data centers just in Texas, although they do caution that only a modest percentage of these will be completed.

The AI story began to resonate with pipeline investors early last year. It’s not just the Mag 7 that were the beneficiaries. Midstream is the seller of pickaxes to gold miners. Those data centers need electricity, 43% of which in the US comes from natural gas.

It’s caused the sector to become bifurcated. There’s no AI-angle in liquids – improving vehicle efficiency has capped transportation gasoline demand for years.

This has shown up in the performance of the Alerian MLP ETF (AMLP) , which tracks the Alerian MLP Infrastructure Index, albeit from a distance. AMLP, like its index, is underweight natural gas exposure and has half its assets in oil-based names as well as gathering and processing, because that’s generally where the remaining MLPs are to be found. Since the beginning of last year, AMLP has returned 19% pa, slightly ahead of the S&P500 because it does have some gas exposure via Energy Transfer and Cheniere Energy Partners (CQP).

The midstream sector returned 31% pa over this time, led by corporations such as Williams Companies (returned 70% pa since the beginning of last year), Targa Resources (59% pa), Kinder Morgan (47% pa) and Cheniere Inc (25% pa, ahead of its MLP CQP at 19% pa).

AMLP’s underperformance of the sector does overstate the case somewhat, because fees and expenses (5.5% over the past year) create a significant gap versus its own index. Unusually for an ETF, those fund expenses include corporate taxes, whose calculation sometimes trips them up (see AMLP Fails Its Investors Again).

The point remains though that neither a diversified portfolio of MLPs nor the concentrated form offered by AMLP provides much AI exposure (see There’s No AI in AMLP). AMLP is 49% allocated to just four holdings (see AMLP Is Running Out Of Names).

A couple of midstream companies reported some interest from New England states (not mentioning names) in improved gas supply. Perhaps the challenges with offshore wind or the rising costs of power to their residents are a cause for concern.

Attempts to connect the region with gas from Pennsylvania were abandoned several years ago because of regulatory impediments at the state level. The list of canceled projects includes Williams Companies’ Constitution Pipeline, which faced years of delays over a water permit in New York.

Interior Secretary Doug Burgum suggested that there may be an agreement with New York State governor Kathy Hochul that would allow construction of a new pipeline.

A gas pipeline from Pennsylvania across New York could potentially reach Massachusetts. Using more Appalachian gas would at least save Boston from relying on expensive and embarrassing LNG imports. But no midstream company is likely to commit to a large infrastructure project across a swathe of liberal states without clear support from state governments.

Properly maintained, gas pipelines last for decades. For an example, here’s a 1950 documentary about the Panhandle Eastern Pipe Line Company. I love these old videos. They remind us how long energy infrastructure lasts. Seventy five years later Panhandle is still operating, owned by Energy Transfer. Its construction costs were undoubtedly fully depreciated a long time ago, and it’s still making money.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

Notes From The Midstream Industry Conference

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Notes From The Midstream Industry Conference
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My partner Henry Hoffman attended the 22nd Annual Energy Infrastructure CEO & Investor Conference in Aventura, FL last week. Below are Henry’s notes from presentations and meetings.

The mood at this year’s conference was upbeat, with natural gas demand driven by data center power requirements and the next wave of LNG projects taking center stage. Interestingly, crude oil and even crude prices were scarcely mentioned in many discussions. Below are highlights from meetings with several management teams:

 

Williams Companies (WMB)

WMB stood out as one of the most engaging discussions of the conference, offering unique insights into data center-driven power demand. CEO Alan Armstrong emphasized that hyperscalers (companies such as Amazon, Microsoft and Google) are seeking fast, reliable, full-scope solutions where trust and execution matter more than cost. Chad Zamarin, the incoming CEO, underscored their close, integrated work with hyperscalers.

He dismissed concerns about stranded assets from behind-the-meter power solutions, explaining that their 10-year deals are designed for flexibility, resilience, and the opportunity to scale on-site relationships. CFO John Porter highlighted the steady ramp expected in power demand, with investments that are capital-efficient, economically attractive, and not a strain on the balance sheet.

The Williams team also expressed confidence in gas turbine supply, noting Williams’ scale as a major turbine customer across its compression and power systems. There was clear enthusiasm for permitting reform — particularly legislation that would limit legal challenges to parties with actual harm—citing the potential to significantly reduce costs and delays in infrastructure development. The bill passed by the House on Thursday included a provision allowing certain pipelines to benefit from an expedited permitting process.

WMB CFO John Porter said he’s a subscriber of our blog and is a fan. As we often tell people, once signed up and on the Friends of Simon list, there’s no getting off.

 

Energy Transfer (ET)

ET echoed similar enthusiasm around data center growth. Adam Arther, who heads up datacenter discussions for the company, noted that they’re actively engaged with 150 data center projects in Texas and another 150 outside the state. He outlined a clear customer preference hierarchy: (1) hyperscalers, (2) utilities, (3) legacy data center developers, and (4) speculative real estate players aiming to flip early-stage projects. ET’s differentiator, he said, is its reliability and redundancy—proven during Winter Storm Uri in 2021.

CFO Dylan also discussed progress at their Lake Charles LNG export terminal, highlighting strong commercial momentum and growing equity interest from strategic and private equity investors.

 

Enterprise Products (EPD) & Targa Resources (TRGP)

Both EPD and TRGP emphasized robust global demand for Natural Gas Liquids (NGLs, which include ethane, propane and butane). EPD noted that Chinese buyers are still active with volumes that have simply been rerouted to minimize tariff exposure. Ethane appears to be exempt from tariffs in practice, despite the lack of a formal declaration from China. EPD remains comfortable with its industry-leading low leverage and is signaling higher buybacks ahead. Management believes this will support a faster pace of dividend growth by retaining more cash, as equity is viewed as the company’s most expensive capital source.

TRGP CEO Matt Meloy offered a noteworthy counterpoint to concerns about a slowdown in Permian oil production. With TRGP processing 25% of Permian gas volumes, he reported ongoing volume growth on their system—suggesting the production outlook may be more resilient than bearish oil-price narratives suggest. Permian oil wells produce associated gas, and over time the mix becomes more gassy because output from gas wells declines more slowly than oil. This is why TRGP and others see gas volumes growing even with declining oil output.

 

NextDecade (NEXT)

NEXT remains confident in taking Final Investment Decision (FID) on Train 4 of their Rio Grande LNG export terminal by year-end, with hopes to sanction Train 5 concurrently. They report negotiations with general contractor Bechtel about a “price refresh” are on track for completion by the end of June. Given that Train 5 is nearly identical to Train 4 and located adjacent to it, pricing and execution should move quickly. Management also indicated they plan to secure FERC and DOE approvals for the remaining trains after finalizing FID on Trains 4 and 5. Last year a DC Circuit Court vacated an environmental permit which caused a delay in construction. The upside of this is that Train 5 contracting now benefits from higher pricing.

 

DT Midstream (DTM)

CEO David Slater reiterated his preference for working with utilities rather than pursuing behind-the-meter opportunities. Given his utility background, this traditional, lower-risk approach of helping utilities expand grid capacity is unsurprising and aligns with DTM’s overall strategy.

The conference made clear that natural gas demand—particularly from data centers and LNG—is a defining growth theme. Companies expressed confidence in NGL market strength, emphasized their differentiated value propositions, and shared optimism about meaningful permitting reform. In contrast, crude oil and pricing barely registered as topics of interest.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF

 

 

 

Worrying Inflation Forecasts

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In early April JPMorgan reacted to Liberation Day by forecasting a recession in the second half of the year. They assumed the tariffs would cause a drop in business investment. They also raised their inflation forecast. They didn’t reckon on the President’s tariff flexibility, and so dropped their recession call following the 90 day moratorium agreed with China.

Nonetheless, it looks as if 10% tariffs will be the minimum to sell into the US. The Fed thinks this may boost inflation in the short term. They banished the word “transitory” in 2022 when the inflation spurt started to look permanent. But they may settle on “temporary” to explain tariff inflation.

Barry Knapp of Ironsides Macroeconomics believes tariffs won’t boost inflation because money supply growth is much lower than during the pandemic-inspired fiscal uber-stimulus. However, the budget negotiations in Congress don’t incorporate much fiscal discipline, hence the Moody’s downgrade.

Bond investors have long granted the US a free pass on our dismal budget trajectory. Lending the Federal government long term funds at 4-5% has never appealed to me, but foreign central banks, sovereign wealth funds and other institutions own $TNs of our debt.

Economist Ken Rogoff, who recently published Our Dollar, Your Problem estimates that the dollar’s reserve currency status reduces the yields on our bonds by around 0.5%. With $36TN of indebtedness that’s worth $180BN annually. The jump in yields that followed the downgrade won’t help.

The University of Michigan consumer survey revealed a startling jump in inflation expectations last month (see Stagflation). A quarter of respondents think five-year inflation will exceed 10%. The average is 4.1%, the highest it’s been in over thirty years. That’s not good for those expecting the Fed to pursue multiple rate cuts this year.

It turns out that the survey’s a good predictor. The one-year outlook and annual inflation three months later have a correlation of 0.7.  It may be somewhat self-fulfilling in that consumers behave consistent with their expectations. As the chart shows, they track each other closely and actual inflation reliably follows the forecast.

Given his background in real estate and penchant for debt-financed tax cuts, Trump is unlikely to be too concerned about higher inflation. Your blogger’s investments are arranged accordingly.

For owners of pipelines, inflation isn’t the scourge that it is for most investors. Companies generally have pricing power because of limited alternatives, with the regulations designed to curb excesses while assuring an adequate return on invested capital.

In 2022 the ceiling on fee hikes for liquids pipelines was 13.3%, which supported subsequent earnings growth. The Bureau of Labor Statistics began publishing a natural gas pipeline transportation index three years ago. It’s volatile. The most recent year-on-year increase was 4.2%.

Forecasts of peak oil production from shale have weighed on midstream recently. But the outlook for natural gas production remains strong. Morgan Stanley reports that Enterprise Products Partners expects 1.5 Billion Cubic Feet per day (BCF/D) of additional associated gas from the Permian over the next two years. Targa Resources expect 0.8-1.2 BCF/D over the next one year.

In spite of this, Morgan Stanley’s E&P team thinks the domestic market will be short 3 BCF/D next year because of growing Liquefied Natural Gas (LNG) demand. The Golden Pass LNG export terminal owned by Qatar and Exxon Mobil is expected to begin production late this year or early 2026.  It has a capacity of 2.4 BCF/D.

Although we often remind investors that pipelines are generally not that exposed to commodity prices, unmet demand for natural gas is unlikely to be an adverse scenario.

Taiwan closed down their last nuclear reactor recently and is seeking imports of LNG as a replacement. Following the Fukushima disaster in 2011, public concern about nuclear energy increased. Unfortunately, this has left the country almost completely dependent on imported hydrocarbons. In 2023 Taiwan relied on gas and coal for 80% of its electricity. Solar and wind were 8%.

Progressives must regard this as a policy win. They are best described by an Oscar Wilde quote: “Some cause happiness wherever they go; others, whenever they go.”

More accurate is to quote JPMorgan’s Mike Cambalest who wrote in March:

“What was Taiwan thinking by shutting down nuclear power which has fallen from 50% to 5% of generation? Taiwan is now one of the most energy dependent countries in the world, resulting in rising economic costs if China were to impose a blockade.”

Inflation and more natural gas demand are a good combination for midstream.

We have two have funds that seek to profit from this environment:

Energy Mutual Fund Energy ETF
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