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Fitch Analyst Says Algerian Blast May Stiffen Opposition to LNG, Raise Costs

Fitch Analyst Says Algerian Blast May Stiffen Opposition to LNG, Raise Costs

The deadly explosion at Algeria's largest liquefied natural gas (LNG) complex earlier this month may raise the perceptions of risk associated with the fuel and increase insurance costs during a critical period of planned LNG plant expansion in the United States and overseas, says an energy analyst with Fitch Ratings in London.

The Jan. 20 blast killed up to 30 workers, injured more than 70 others and destroyed half of the capacity at the coastal LNG complex in Skikda, Algeria. It is considered the greatest single disaster in the LNG industry's 40-year history, which until last week had a nearly spotless safety record.

Prior to the accident, the Skikda plant, which had a capacity of 8 billion cubic meters per year, produced 25% of Algeria's LNG and exports for mostly European markets. During the first nine months of 2003, Algeria also accounted for 37 Bcf of the total 381 Bcf of LNG imported into the United States.

In the short term, insurance premiums for LNG projects are expected to rise materially, according Fitch Ratings' oil and gas analyst Isaac Xenitides. This comes at a critical time when industry is looking for project financing, which requires companies to have business-interruption insurance, to fund LNG capacity expansion, he noted.

The insurance costs may retreat once more information about the explosion is identified, according to Xenitides. The blast currently is believed to have been due to a "mechanical failure" related to a steam boiler used in the LNG liquefaction process.

He further anticipates that the Algerian incident will add more fuel to the lobbying efforts of local interests who are opposed to LNG facility construction due to aesthetic and safety concerns. This may delay existing timelines for LNG construction within a capacity-constrained marketplace or add to capital costs, he said.

There are scores of applications pending at the Federal Energy Regulatory Commission to build LNG import terminals and associated facilities, and a number are in the planning stages. It's unclear at this stage whether the fallout from the Algerian explosion could affect these U.S. LNG projects.

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