Michigan GREEN - LNG Stalls but Will Accelerate

November 12, 2008

Liquefied natural gas is now taking a back seat to other fuels, and especially since the global credit crisis has taken hold. But over the next decade and as the demand for power resumes, it could assume a notable role in the country's overall energy plan.

Despite growing energy demand from the four corners of the world, the United States will be able to attract LNG supplies from foreign suppliers. Even though other nations will pay higher prices for such natural gas in the near term, this nation will become a lucrative market for LNG providers because of its sustained energy demand, its strong infrastructure and its reliability as a partner.

"In the short term, until worldwide LNG supplies increase more substantially and U.S. demand requirements increase as projected, the study shows relatively little LNG headed toward this country," writes Benjamin Schlesinger, who just produced a report for the American Gas Association. "The high, albeit volatile, level of U.S. natural gas prices makes shale and other domestic unconventional gas supplies economic. The development of these unconventional supplies will enable the U.S. to meet demand as LNG goes to other markets."

According to the gas foundation's analysis, LNG imports are expected to rise from its current level of 1.1 billion cubic feet per day to 12.8 billion cubic feet per day within 10 years. At present, natural gas supplies 20 percent of this country's electric generation portfolio, with LNG providing roughly 2-3 percent of that total. The Department of Energy is projecting that figure to grow to 16 percent by 2030.

LNG imports here, interestingly, have shrunk in the last year -- due in part to stronger demand in Europe and the diversion of supplies to Asia. That dynamic means that producers are getting higher prices from other nations for their fixed supplies. Meanwhile, Saudi Arabia is warning that highly leveraged LNG projects could suffer financially from the global credit crisis.

But none of that will last forever. Demand will resume and more facilities are expected to be brought on line. Two offshore facilities have recently been set up while five new LNG import terminals are under construction, all in the United States. Globally, several more plants are in the works, which the gas foundation's analysis says should increase the amount of LNG supplies by more than 50 percent in the next decade. Roughly a dozen countries will be providing much of the LNG to this country during that time period, with the two largest ones likely to be Trinidad and Nigeria.

"The U.S. will need increased LNG imports to supply growing gas demand for electricity generation ... and to help the nation comply with climate change strategies," says Schlesinger. "LNG importation to the U.S. is expected to surpass that of Europe within the next decade, although the Asian market for LNG will remain the world's largest in the meantime, especially as China and India increase their LNG imports."

Universal Price

LNG first gained global prominence around 2000 when the price of natural gas soared past its threshold rates of $2-$3 per million BTUs. With such prices now averaging in the $6-$8 range -- and much higher in Europe -- LNG has become an attractive option and particularly as the technologies to produce it has gotten better and cheaper.

Currently, the price of LNG in Asia and Europe is indexed to the price of oil. While oil prices have recently fallen, they had remained well above $100 a barrel. That has meant that those regions have been paying substantially higher prices for LNG than their industrial counterparts in the United States where those prices are pegged to supply and demand. Some therefore fear that such a phenomenon could leave LNG developers here with expensive facilities that are not running at capacity.

"If I can divert my cargo to another place in the world that has a higher value, then I want to have that option," says Jay Kelley, senior partner with Vinson & Elkins' energy practice. "I've talked to very few people who think that too many more terminals will actually get built here."

The developers of U.S.-based projects say that they will not be caught off guard. The likes of Chevron, ExxonMobil and Shell have invested billions all over the world in liquefaction plants, ships and re-gasification facilities. And with the global demand for natural gas anticipated to be in the 2.6 percent range a year until 2030, those companies are expecting their LNG ventures to pay off.

Sempra LNG, meanwhile, responds by saying that before it would build any receiving terminal, it makes sure that it has the underlying contracts in place to fill the facility to capacity. Its Baja plant in Mexico, for example, is taken up fully by Shell and BP of Indonesia, all under long-term contracts. After those oil companies deliver the LNG to the terminal, Sempra then sells it into the market.

"The simple truth is that LNG is now often competitive with domestic production -- a fact that was not true a decade ago, and hence North America will be able to attract supplies once near-term supply bottlenecks are relieved," says Schlesinger. "In the long-term, ample supplies will fundamentally alter the way that LNG is priced in the Pacific Basin. The region will likely transition from an oil-parity pricing mechanism to a market based prices where gas-on-gas competition sets the price."

The bottom line is that as the demand for power escalates, price discrepancies will fade. Over the next couple years, those pressures will be unnoticeable and henceforth the LNG will remain a small component of this country's generation supply. But over the next decade, the gas foundation says that worldwide supplies will take off. As the global marketplace for LNG develops, it says that there will be profound implications on how the commodity is priced and traded.

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