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Consultant: LNG Won't Lead to Sharply Lower U.S. Spot Prices

Don't count on a multitude of new liquefied natural gas (LNG) import terminals and a flood of LNG collapsing domestic gas prices, said James Trifon, Wood Mackenzie's managing consultant for North America LNG. Most of the import terminals planned won't make it, and the underlying tight domestic supply situation will continue to support the market, he said in a preview of a presentation to be given at GasMart on March 18 in New Orleans (see http://www.gasmart.com/).

"There are people who think that LNG will be cheap and plentiful, but they tend to forget that there are other countries that it is heading toward; it's not just a U.S. phenomena," said Trifon in an interview with NGI.

He said power generators and industrial companies often think they will command a discount price when dealing with an LNG supplier. Generators want LNG delivered based on a unit electricity price. Industrials will say "if your deal works at $3.50/MMBtu, you should sell it to me for $3.75; that way I get cheap supply and you make your project work." But that's not how the LNG market operates, Trifon noted. "LNG is going to be sold based on the market price in whatever area you are bringing it in."

A lot of it probably will be arriving along the Gulf Coast around the Henry Hub and that should put some downward pressure on gas prices, but before too long other factors will come into play and prices will quickly find support.

"There's also not enough LNG out there to crater the market," he said, noting that demand is growing in Europe and in Asia. Furthermore, if domestic gas prices begin to fall sharply, there will be an economic impact on unconventional gas production in the Lower 48 states.

"If prices go too low, you won't have unconventional gas production, so therefore you start having a supply gap again, and then boom prices have to go back up. If prices fall too far, you also may not have discretionary LNG cargoes coming in."

However, Trifon also said that LNG companies that have designed their business models around the development of an LNG spot market may be in for a rude awakening. Most of the LNG will remain under long-term agreement because terminals and liquefaction projects depend on that contract structure in order to financially support construction.

"There won't be an LNG spot market in terms of the way we think of oil or natural gas," he said. "You can't just cruise around the world and pick up cheap LNG supply. If you are taking it to the U.S., the [supplier] expects a U.S.-based price. If you are taking it to Europe they want a Europe-based price. But there is not a big distressed market out there. You might pick up a few shipments, but I don't know if you can pin your company on it and make that business model work."

He expects most of the planned LNG terminals in the United States to end up gathering dust on the bookshelf. Unlike the power market, the LNG market can't be overbuilt, he said. Upstream and downstream infrastructure must be brought online in concert. "Upstream is not going to be developed without having an outlet, and downstream, no one is going to build without having supply." Those factors will keep the market closely in check.

Trifon will be presenting his ideas on the Supply Alternatives panel at GasMart in New Orleans on March 18. For more information go to http://www.gasmart.com/.

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