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Meeting of LNG Exporting Countries Over Price Controls Alarms Consumers

News that some of the world's leading liquefied natural gas (LNG) exporters got together in Trinidad last week to discuss price fixing, a la OPEC, alarmed some gas industry officials in the United States.

Trinidad Energy Minister Eric Williams said officials from Trinidad, Iran, Algeria, Malaysia, Brunei, Libya, Egypt, Bolivia, Indonesia, Venezuela, Oman, Nigeria, Qatar and the United Arab Emirates, who are members of the four-year-old Gas Exporting Countries Forum, explored the possibility of agreeing on a target price for LNG at a meeting in Trinidad's capital on Wednesday.

What that target price would be "is in the eye of the beholder," Williams acknowledged, according to a report by the Associated Press. He said that for now the countries want to share production data and market intelligence. "We are not a cartel," he said.

The group apparently has no immediate plans to coordinate LNG production policy in an attempt to influence prices the way the Organization of Petroleum Exporting Countries (OPEC) does. But the possibility of that happening down the road was enough to alarm officials at the American Public Gas Association (APGA), which represents municipal and public gas utility systems across the United States.

"We're very concerned about it. It seems like we're going the way of oil and OPEC," said David Schryver, vice president for congressional affairs at APGA. "We don't want other countries setting a price for us particularly when we have sufficient gas at home that's being kept off limits."

APGA has sent letters in recent weeks to Federal Reserve Chairman Alan Greenspan, President Bush and administration officials urging them to advocate opening areas where oil and gas drilling currently is off limits rather than focusing on importing more LNG (see related story and NGI, April 4, April 18).

"Certainly LNG needs to be a component of any energy policy, but when you increase percentages significantly more than where they are currently I think we're just setting ourselves up for more dependence on foreign fuel and decreasing our domestic energy security," said Schryver. "We think it's a real threat."

LNG is a rapidly growing source of U.S. energy supply. U.S. LNG imports soared 29% last year to 652 Bcf. Trinidad made up 71% of the total. While LNG still only makes up about 3% of total U.S. demand, the Department of Energy is expecting LNG imports to grow another 12% this year to 730 Bcf, and make up more than 20% of total U.S. gas supply by 2025, with imports of 6.4 Tcf.

Schryver said that APGA believes that once LNG reaches 15% of total gas supply in the United States, foreign countries will have the ability to significantly increase U.S. natural gas prices. "We should reach that within 20 years. It may happen quicker than people think because as our domestic supply continues to decrease. We are going to have to rely on LNG more and more.

"We've been pushing for opening up drilling areas that are currently off limits, looking at the eastern Gulf, off in the Atlantic, off in the Pacific, increasing research into technology that will allow us to get natural gas from methane hydrates. We believe our focus should be on increasing domestic supply."

U.S. consumers certainly should be alarmed about other countries trying to drive up the prices that they pay, but some experts say consumers really have very little to worry about because an OPEC-like cartel simply won't work with LNG.

There are differences between what takes place in the world oil market and the current structure of the LNG market. What's important, according to Poten & Partners' Gordon Shearer, is that LNG represents a very small portion of total worldwide natural gas supply.

"I just don't see the precursors there that you had for OPEC," Shearer said in an interview with NGI. Poten & Partners is working with Amerada Hess to build the Weaver's Cove LNG import terminal in Fall River, MA. Shearer also is the former CEO of Cabot LNG, which operated the LNG import terminal in Everett, MA.

"OPEC is dealing with a very large percentage of the world's oil production. LNG is a very tiny percentage by comparison of the world's natural gas production," he noted. "So the ability to influence the market by how you manage LNG is questionable to say the least."

The second thing is that more than 90% of the world's LNG is sold under very long-term contracts with very specific pricing provisions generally tied to conditions in the end-use-country's market, he said. "What you would have to be looking at in order to see some sort of ability to essentially influence the price is for somebody to go out and start breaking all those contracts."

A third element, Shearer said, is that there is a very liquid oil tanker market with short-term charters, and a liquid terminaling and refining market globally. That's not true of LNG, for which there are a limited number of import terminals, many of which have peculiar characteristics.

Moving LNG around the world is a much different process than moving oil around. The LNG tanker market isn't liquid. The cost of transportation is significantly higher for LNG than for transporting the same amount of oil.

"We have $50/bbl oil and what does it cost you to move it to the Gulf of Mexico from the Persian Gulf, about $1? That's 2% of the cost," said Shearer. "With natural gas it's $1.50 to move the gas as LNG from the Persian Gulf to the Gulf of Mexico with a landing price of say $6; so 25% of the cost is in transportation. Right there you've got a real problem with liquidity. There are big price differentials that are going to arise simply out of the fact that the transportation cost is such a high percentage of the delivered cost.

"I just don't see the market dynamics there that would lend themselves to a similar cartel influence," he said. "If LNG stopped arriving in North America tomorrow, prices would go up, but not dramatically. Then there's the question where would all that LNG go? I don't think there's the receiving terminal capacity or the market in the world to take it all.

"Nothing is impossible, but it seems improbable [that a natural gas cartel could function], and if it were to happen it would be 10-20 years away from now and you would have to have a massive increase in LNG flows, much greater than what people are predicting and you would have to have an LNG market that was essentially dominated by short-term transactions to the same extent today that it is dominated by long-term deals."

Shearer speculated that something more than 50% of the world's LNG would have to be moved under short-term arrangements for a cartel to have any major influence over the price. Some in the industry believe those things actually could happen and the world LNG market is in fact headed exactly in that direction.

Stephen L. Thumb of Arlington, VA-based Energy Ventures Analysis said he buys into the ExxonMobil theory that the Atlantic Basin eventually will become one big linked natural gas spot market with many more short-term LNG shipments. In fact some companies, such as Excelerate, have developed their entire regasification business model on that occurring.

"We think particularly the Atlantic Basin and to a degree the stuff coming out of the Middle East will shift more towards a short-term market," said Thumb. "That will keep growing as they do away with destination clauses in contracts. They've already started to get that going. Several of the terminals will put out a number of cargoes each month and let people bid on them. That's how [Excelerate's] Gulf Gateways Energy Bridge has been operating.

"That's not to say that long-term contracts will go away," he said. "It's just that the percentage of supply that is in the short-term market will be growing. If you accept that the spot LNG market will get bigger, you should expect linkages starting to form -- not rigid linkages -- between the European and U.S. markets. When Europe has a really cold winter, they will try and bid away the 20% of the LNG market that is spot, and when [the U.S.] has a cold winter we will try to bid away."

Shearer agreed that there is a short-term LNG market developing but he also noted that as most new LNG projects are brought on stream developers are still trying to firm up the LNG sales under long-term contracts and that is likely to prevent a substantial spot market from developing.

"Look at Sakhalin with Shell," he said. "Today they are essentially sold out under long-term contracts. In Qatar, nearly all the projects are moving LNG under long-term contracts.

"A lot of the short-term volumes are coming out of debottlenecking or spare capacity that was built into the plants for conservative reasons, a little bit of speculative shipping." Shearer said LNG plants are not built with the idea of marketing LNG into a short-term spot market. The high cost of infrastructure and the current limited market make it implausible. "If you are not running a liquefaction plant at 90% capacity you are not making money," he said.

That's a big part of the reason there is a distinct lack of price control on the part of the LNG supplier, and will be for years to come, he said.

"LNG is a different world in terms of the leverage of supply," Thumb agreed.

The two experts also pointed to the large number of countries that make up the Gas Exporting Counties Forum. There are 14 formal member nations and several more about to become members. In contrast, only about seven countries hold most of the power in OPEC. More members, particularly competing ones, make it more difficult to come to an agreement.

Nevertheless, the world's gas reserves are more concentrated than the world's oil reserves, noted a recent study on the "Geopolitics of Natural Gas" by professors at Rice University. Although the forum's current members are too great in number and have divergent interests, over the long term gas exports could become "concentrated in the hands of just a few major producers, which could make it more feasible for a group of gas producers to restrain capacity expansion to gain higher rents," the study found.

But it is likely to be "a decade or more before they can assert sustained monopoly power in world gas markets, leaving consumer countries ample time and opportunity to adopt counter measures," the study said.

"Look at the number of liquefaction plants in existence and planned," said Thumb. "Russia is barely on the horizon. Iran is struggling to get its first two up and going. Australia and Norway are going 90 miles an hour. Egypt and other new countries are moving so much faster." Competition rather than collusion is more likely the direction the world gas market will take, he said.

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