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Market for West LNG Expected to Improve

Recent market research indicates that the there will be an easing of the tight global liquefied natural gas (LNG) market and capacity could reach 45.95 Bcf/d for LNG production by 2014, according to an executive with Oregon LNG, which is seeking FERC approval to build a 1.5 Bcf/d LNG tolling facility at the mouth of the Columbia River near Warrenton, OR.

The proposed facility is targeted to start operation in 2013. The projected increase in the next five years could be better than 60%, compared to the current global LNG production this year of about 27.7 Bcf/d, said Mohammed Alrai, a senior vice president with Oregon LNG who helped develop the initial Oregon LNG terminal plans for Calpine Corp. when it was designated the Skipanon Project. Alrai talked to NGI last Thursday about his firm's plans as the backer of one of three major LNG proposals currently active in Oregon.

"Once we have this project permitted, we believe the market is going to be ready for our timeline of having the project ready in 2013-2014; we've heard that consistently from everybody -- LNG producers, some of the players in the market and downstream customers," Alrai said. How much capacity will have to be under contract will depend on the market, he said, but Oregon LNG is thinking it will be at least half to 80% to start construction.

"As is apparent from the last few years, the LNG supply situation is currently tight; however, it was only a few years ago that producers were providing discounts to customers to take their production volume,"Alrai said. "It is not anticipated that the LNG market will return to historical conditions, but it is the expectation that the LNG supply situation will improve over the next few years and especially after 2013."

Oregon LNG is betting that markets will improve by 2010, global production levels will increase, and extra LNG volume will come to the U.S. West Coast after the traditional market for LNG -- northern Asia -- is served. Alrai likes his company's position once the market opens up, assuming he can gain federal approvals by the end of next year. "We should have all the permits in hand by the end of 2009; FERC is the big one, but there is also state permits and the U.S. Coast Guard," he said.

"We have a lot of flexibility in how we can structure our deals [for capacity in the proposed LNG terminal]," said Alrai, noting that all of Oregon LNG's developmental costs are covered by its backers, so it doesn't have to worry about going into the troubled financial markets in 2009. "We're not just looking for the traditional long-term, 20-year terminal use agreements. We might do five-year deals with two more five-year options, or three- to five-year deals for a lot of capacity that would decrease later after the first three or five years. A lot of creative structures could eventually come into play.

"A final investment decision will be made at the beginning of 2010," he said, noting that Oregon LNG will pursue some sort of project financing that includes 70-80% debt and the rest in equity. "The good thing is we're not going into the market in 2009 to raise any money for this project."

Oregon LNG intends to have interconnections with the Mist Storage Facility in Oregon through a 120-mile 36-inch diameter pipeline from its terminal, along with a 10-mile pipeline lateral. It also would be linked to a network of interstate gas pipelines that traverse the Pacific Northwest reaching in all directions throughout the region, Alrai said.

In addition to the proximity to storage and a large, very liquid gas market spread around the West, Alrai said Oregon LNG has the advantage of a deep-water site that can handle large ships of various sizes, with minimal nearby population, minimal "critical infrastructure" close, and "minimal" environmental impact.

"After lengthy due diligence throughout the Orange Coast, a site was chosen on the Columbia River that met all of the criteria and more," Alrai said.

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