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Arbitrage in Liquified Natural Gas

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Arbitrage in Liquified Natural Gas
Arbitrage in
LIQUIFIED Natural Gas

December 2012
Take a look at the long-term charts of crude oil and natural gas. The historical oil-to-gas price ratios have ranged from 6:1 to 10:1 before the economic crisis. Since one barrel of oil contains the energy equivalent of the 5.825 million BTU of natural gas, an implied BTU arbitrage kept this relationship in check.
Spot natural gas traded as low 1.905 earlier in the week implying an energy equivalent price of a barrel of crude oil of $11.10. Spot crude closed at $105.23 on the same day. (Business Insider, April, 2012)

There was a time when natural gas was treated as an unwanted byproduct of crude oil production and simply flared off. Now it is a common replacement for crude oil and a major source of energy for many nations. Natural gas comprises 22% of worldwide energy demand (Morgan Stanley Research, March, 2011). Natgas consumption is forecast to double by 2030. It is the fastest growing energy source in the world and the most flexible of all primary fossil fuels. Its uses include power generation, home heating/cooking, fertilizer and is also convertible to diesel fuel for automobiles. It is also colorless, odorless and burns cleaner than other fossil fuels.
Unlike oil and coal, natural gas cannot simply be loaded on a ship or train for transportation from its source to the consumer. Historically, gas required expensive pipelines which were uneconomic over large distances. The other option was using complicated conversion systems to cool the gas into liquid form or modify its chemical composition to allow conversion to other products. Technology advances and declining costs have finally allowed gas to overcome these economic challenges.
Introduction
In the United States energy independence has been a hot topic since the oil embargo implemented by OPEC in 1973. At the time, the embargo awakened an awareness that America is dependent on oil imports. The threat to


Cited: 1. "A Huge Energy Arbitrage Opportunity Has Emerged." Business Insider. N.p., 06 Apr. 2012. Web. 22 Nov. 2012. http://articles.businessinsider.com/2012-04-06/markets/31297989_1_crude-natural-gas-clean-energy-fuels 2 3. "Cheniere Energy, Inc." Cheniere Energy, Inc. N.p., n.d. Web. 22 Nov. 2012. http://www.cheniere.com/default.shtml 4 5. "Latest News." Arcticgas.gov. N.p., n.d. Web. 22 Nov. 2012. http://www.arcticgas.gov/ 6. "Natural Gas Inventories Finish 2012 Storage at Record Levels." Latest News. N.p., n.d. Web. 22 Nov. 2012. http://www.cattlenetwork.com/cattle-news/latest/Natural-gas-inventories-finish-2012-storage-at-record-levels--177940761.html?view=all 7 10. Hubbard, James R., Stuart Baker, and Evan Callo. "Morgan Stanley Blue Paper." Morgan Stanley Research. Morgan Stanley & Co. International, 14 Mar. 2011. Web. 22 Nov. 2012. 11. "Liquified Natural Gas: Understanding the Basic Facts." Dept. of Energy United States of America, Aug. 2005. Web. Nov. 2012. 12. "DownstreamToday.com - News and Information for the Downstream Oil and Gas Industry."DownstreamToday.com - News and Information for the Downstream Oil and Gas Industry. N.p., n.d. Web. 22 Nov. 2012. http://www.downstreamtoday.com/news/article.aspx? 13 14. "Qatargas - Home." Qatargas - Home. N.p., n.d. Web. 22 Nov. 2012. http://www.qatargas.com/English/Pages/default.aspx 15 16. "One Day - One Word." 2B1stconsulting. N.p., n.d. Web. 23 Nov. 2012. http://www.2b1stconsulting.com/liquefaction/
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