“How big can it get?” That’s a question Eric Sprott asks himself before he puts his dough in a stock. It may seem a small question, but I think it’s helped him guide his fund, Sprott Offshore, to a 21% annual return over the past nine years, versus a 1.1% loss for the market. If you want big returns, you have to start with acorns, not oak trees.

So I ask myself as I sit here in the first days of 2010 and think through the opportunities in front of me today: What can get big? Where can we really score?

I have one play in mind that can easily get 235% bigger in the coming year (more on that at the end of today’s article). It will make hay from a number of big trends moving its way. We’ll start with one of them: the rise of LNG, or liquefied natural gas. (LNG is supercooled natural gas, which turns into a liquid that you can then ship on tankers.)

Last year was a big year for LNG. We saw a wave of new capacity hit the market. We had new LNG terminals take their first deliveries in 2009 — in Kuwait, Canada, Brazil and Argentina. We had new facilities open in the U.K. And China and India also imported more LNG.

In the great quest to boost energy supplies, LNG could get much bigger. It makes up only 7% of natural gas supplies today, but LNG trade volumes are up 65% since 2000. Industry forecasts call for another 180% increase over the next 10 years. Nearly every big oil and gas company is upping its LNG capacity.

There are massive LNG projects out there and output will grow. Let’s look at just two places in the world where LNG is undergoing huge expansion.

The first is Qatar. It’s pronounced something like “cut-ter,” not “kuh-tar.” Most people probably couldn’t find it on a map, much less say it correctly. Travel writer Jonathan Raban described its geographical location in Arabia as “hardly more than a vestigial limb sticking out into the Gulf from the giant torso of Saudi Arabia.”

Qatar is one of those places where the pixie dust of globalization worked its quick magic. Anything before 1950 seems like another age, when people still lived in huts and rode camels. I was in Doha, the capital city, in October of last year. And I can vouch for Raban’s fitting description of “a lovely little golden city on the sea; and as the fairy lights came upon the minarets, Doha gleamed and twinkled as prettily as it had quite forgotten where it was and had mistaken the Gulf for the Riviera.”

Qatar is also the world’s leading exporter of LNG, with big plans for the years ahead. This pinky-sized country has more natural gas than anyone save Russia and Iran, with about 15% of the world’s total reserves. It plans to boost its capacity of LNG from 54 million tons to 77 million tons by the end of 2010.

Last year, it opened Qatargas 2, a $13 billion project and the largest LNG project in the world. Two more will come online this year. Natural gas prices are down, but the Qataris are taking the right approach. “This is a long-term business — a 25–40 year investment,” said the CEO of Qatargas.

Then there is Australia, which I’m about to visit (as well as New Zealand) shortly after I finish writing this letter. Australia is looking to become the No. 2 exporter of LNG, behind Qatar, over the next decade.

You may think of Australia as wealthy in resources such as iron ore and gold and coal. But it also has mammoth natural gas deposits offshore in the Indian Ocean. Some think that the boom from these will dwarf earlier resource booms.

“The sums being invested are huge,” reports The Economist. All the big heavies are down under. A joint venture between Chevron, Exxon Mobil and Shell will invest more than $40 billion in LNG. (For perspective, Chevron’s entire capital budget for 2010 is only $21.6 billion.) Called Gorgon, it sets up shop on tiny Barrow Island, a nature preserve and home of the flatback turtle.

Australia is close to the big users of natural gas. The largest importers of LNG are Japan and South Korea. China and India are its two fastest growing markets, also within easy shipping distance. The lucky country got lucky again.

All of it seems to have held up well even in the face of the ugly financial crisis. “You might have thought the global financial crisis would have slowed things down. It hasn’t,” says Graeme Bethune, CEO of Energy Quest. “That shows the global appetite for gas projects.”

So how big can it get? I think it’s clear there is a lot of room for growth. I have by no means given you a comprehensive survey, as we’ve touched only on the largest projects. But there are big untapped gas reserves off the coast of Africa and in the South Pacific. Major investments are going toward building facilities to liquefy the gas so it can be shipped to distant markets.

And that’s going to be a boon for the companies that supply all that goes with LNG — the pipes, cold boxes, heat exchangers, storage systems and lots more. Turns out there are great opportunities here and most are still mere acorns. Watch LNG plays in 2010…

Sincerely,
Chris Mayer

January 8, 2010

Chris Mayer

Chris Mayer is managing editor of the Capital and Crisis and Mayer’s Special Situations newsletters. He also is a contributor to the Daily Reckoning. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas.

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