A "great shakeout" in the North American liquefied natural gas (LNG) import business could take place as early as this year with many of the proposed LNG import terminals being delayed, put indefinitely on hold or simply trashed altogether, according to energy consultant Stephen Thumb of Energy Ventures Analysis (EVA) in Arlington, VA. Thumb said companies are moving so quickly that the vast majority of the supply, infrastructure and markets will be off the table soon.
"I think there are a total of 98 potential projects [in North America] and 10 of those are expansions," Thumb said in an interview. "We list the 10 expansions as separate projects because we're trying to keep track of the timing of the capacity. Of those 98, we have 20 in the so called 'likely' category. It just sure looks like they are going to proceed because: a) they have permits, b) they have locked in some form of supply, or c) they are already under construction -- and even if they have supply problems, it's tough to argue once they are under construction."
Anadarko's proposed Bear Head LNG facility on Cape Breton Island in Nova Scotia falls into that latter category. However, Anadarko announced earlier this month that it is stopping construction on the project until it can line up LNG supply, which it hopes to do over the next few quarters. Thumb said the company initially planned to sign a supply deal with Algeria but has since turned to a Russian firm that looks more promising. Competitors rushed in and basically beat Anadarko to the negotiating table in Algeria, said Thumb.
That has been the story with many other LNG project developers. "We think that 2006 and 2007 are going to be shakeout years for all 98 of these projects because first movers have just jumped in and grabbed not only supply, but customers, infrastructure and position in the markets so they have lead times. You are going to start [hearing] about this one falling off and that one falling off, as opposed to proposal after proposal after proposal."
In addition to the five LNG import terminals currently operating in North America, with 5.24 Bcf/d of peak sendout capacity and expansion plans for another 2.3 Bcf/d of peak sendout, a total of 17 proposed LNG terminals already have been approved by regulators in Mexico, Canada and the United States:
Those proposed facilities would add 24.2 Bcf/d of peak sendout capacity to the market, and at least three of them have already filed with FERC for expansions that would add another 5 Bcf/d of peak sendout. Meanwhile, another 25 LNG import terminals have been filed with regulators in Canada, Mexico and the U.S. and at least 21 others are in the planning stages.
"I think the recent five announcements of expansions -- Sempra's Cameron project, the Cheniere ones, etc. -- are sending signals to the rest of the market that 'hey guys, we've already got our site and we're under construction, and not only that but we're going to expand it. So if you are coming in, you are not coming in against a dog; you are going against a gorilla.'"
Thumb said companies probably won't just keep these projects on their books for extended periods. As was the case with dozens of gas-fired power generation projects after the generation boom a few years ago, many LNG projects will have to be dropped. The market can only absorb so many projects. If all the terminals and expansions were built, there would be about 77 Bcf/d of additional peak sendout capacity added to the market. If only the projects that already have been approved were built, they would add 15.7 Bcf/d of average sendout capacity. Average annual U.S. gas consumption is only 60.3 Bcf/d.
The projects that end up surviving will be faced with low load factors because there probably will be an overcapacity situation, said Thumb. Regasification capacity is cheap compared to the whole supply chain. It's roughly 15% of the total cost. "It's only about 30 cents/MMBtu in rough round terms, and they are going to overbuild it. That's not necessarily a bad thing for the U.S. gas market. It gives [buyers] a lot more flexibility." It's also not necessarily terrible for investors either. "They can cry all the way to the bank. They are going to make money on this. They have some great arbitraging opportunities."
Some companies, however, may be more likely to suffer because of their business models, he noted. Cove Point is likely to prosper, he said. BG Group is sitting pretty "because they are making so much money on the liquefaction side and the shipping and the arbitrage. Shell is in the same boat. BP is too. Cheniere is a little different story," said Thumb. "They are 100% regas and want to be the biggest guy on the block with 10 Bcf/d. That's bigger than both the Arctic pipelines. It remains to be seen whether they can pull that off. But you have to give them credit. So far, they've done a great job. Their next two projects look more speculative."
Terminal congestion probably will play a role in which LNG facilities succeed. For example, there are three LNG projects planned for the Calcasieu Channel in Louisiana: Trunkline LNG in Lake Charles, which is operating, Cameron LNG, which is being built, and Creole Trail, which has been filed with FERC by Cheniere. There also are three planned near the mouth of the Sabine River: Golden Pass, Sabine Pass and Port Arthur LNG. And three more are planned near Corpus Christi: Ingleside LNG, Vista del Sol and Corpus Christi LNG.
"That's a lot of ships to coordinate and a lot of required pipeline takeaway capacity," Thumb noted. "The first movers again will jump in. Those could be areas where there's a shakeout. That's not to say it couldn't be done."
Out of the 98 LNG "projects," on EVA's list, Thumb believes 20 are likely and 13 others are in the "possible" category. "They have imponderables, such as BP's Crown Landing project, which will go to the Supreme Court. If they win, BP will jump in as quick as a cat on that basis differential. If they lose, it's over. That's a tough call to say how it will go."
Another tough one will be Suez's plans offshore Florida, he said. "All the Bahamas projects are dead now, but can Suez pull this one off offshore Florida? It's a great concept, and the basis is there, and Suez is one powerful company in the world LNG domain," he said. "They could do it, but they don't have it all technically lined up yet. And Elba is trying fast as it can to steal some of that market share from them."
Two of the three projects proposed offshore Boston, i.e., either Excelerate's Northeast Gateway or Suez's Neptune project, also are on EVA's "possible" list. However, Thumb said Canaport and Bear Head may well "squeeze out" the Boston projects if LNG gets moving in Canada first.
"You can't take that much gas flowing in, particularly with no storage up there," he said. "We're seeing one offshore Boston at best, and I'm not sure I would take that gamble unless you think Bear Head is going to die..., then I would take that gamble."
Others on the "possible" list include Cheniere's Corpus Christi project, Gulf Coast LNG Partners' Calhoun LNG project in Port Lavaca, TX, Freeport McMoRan's Main Pass Energy Hub, Galveston LNG's Kitimat project in British Columbia and Sempra's Port Arthur project.
EVA's list of the projects most likely to succeed include the following:
For more from EVA, go to http://www.evainc.com/.
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