The construction of just two to three new liquefied natural gas (LNG) terminals, along with the planned expansions of the existing import facilities in the United States, would be enough to provide a “significant incremental addition in gas supply” over the next few years, said an official with the American Gas Association (AGA) last Wednesday.

LNG, which currently supplies about 2-3% of the domestic gas market, could account for as much as 10% of the U.S. supply mix in the next three to four years with the construction of a couple of new terminals that have the capacity to deliver 300-350 MMcf/d into pipelines, noted Chris McGill, AGA’s managing director of policy analysis, during a press briefing at the National Press Club in Washington, DC.

Looking to 2008, “LNG could be that next 10% increment of gas supply that we’re looking for,” he told reporters. Those who believe that up to 40 new facilities must be built in order for LNG to make a significant contribution to the U.S. gas market have been misled, said another AGA official.

In the past 10 years, coalbed methane (CBM) went from “virtually nothing to almost 10% of what we produce” today, McGill said. Similarly, deepwater gas production in the Gulf of Mexico went from “almost nothing to 7-8%” of domestic supply now. He sees LNG as the “nearest term option” for satisfying the escalating gas demand in the country. The AGA estimates U.S. gas consumption will be 22-23 Tcf this year.

The four existing LNG terminals on the continental U.S. supply about 800 Bcf to 1.1 Tcf annually to the U.S. market, if they are operating at their maximum capacity. However, McGill noted the facilities currently are operating at about 70-80% capacity. Expansion plans would raise the annual capacity of the existing LNG plants to 1.7 Tcf by 2007-2008. The terminals are expected to import 630-650 Bcf this year, up from more than 500 Bcf in 2003 and double the amount imported in 2002, according to McGill.

As for pipeline take-away capacity from LNG facilities, he said the AGA believes new pipeline infrastructure will be incrementally added as it is needed to handle increased LNG-sourced gas.

McGill also sees Alaska’s North Slope, with its 35-40 Tcf of natural gas, as a critical supply source for the future. Opponents of a pipeline to bring Alaska gas to the Lower 48 states argue that North Slope gas would satisfy U.S. gas needs for only two years. But “it’s not two years worth of national production, it’s 25 years worth of onshore Louisiana production.”

McGill estimated that 84-85% of the natural gas consumed in the United States still comes from the Lower 48 states. In 2002, there was a “reasonably significant” drop in domestic gas production, by about 3%. This was followed by a 1% spurt in 2003. Most prognosticators say gas supply is stabilizing, and expect to see a “slight increase” at the end of this year, he noted.

While there has been a great amount of drilling activity taking place over the past couple of years, it has only “sustained the amount of production in the marketplace,” according to McGill. Dry gas production in the nation was estimated at 50.8 Bcf/d in June, which he said was very close to productive capacity. This compared to production of 50.3 Bcf/d in June 2003.

In the end, McGill said he is optimistic that gas demand can be met in the years ahead if three things happen: 1) domestic production is sustained; 2) greater volumes of LNG-sourced gas are brought to market; and 3) pipeline infrastructure issues are resolved.

Looking to the winter heating season, he said increased demand caused by cold weather is going to again result in run-ups, or so-called “needle peaks,” in natural gas prices. “We do expect to see upward pressure on prices” this winter, but the AGA would not say by how much it expected prices to rise.

In contrast, LNG supplies could be landed in the United States today for $3.50 Mcf, far below domestic prices. “That’s why we’re talking about all these LNG projects. They are economic.”

Pointing to the drop in gas prices over the past month, McGill said “essentially the same thing” occurred last year at this time. From mid-summer to early November, domestic prices fell by about $1/Mcf, according to the Energy Information Administration (EIA). But then they shot up during the winter heating season, making stored gas “quite a bargain,” he noted.

McGill estimated that 2.5 Tcf presently is in storage, with supplies about 5% ahead of the five-year average. To reach the “magic number” of 3 Tcf for the upcoming heating season, he said companies will need to inject 46 Bcf/week over the next 12-week period. This compares to the 78 Bcf/week that companies had to put in storage during the same 12-week period last year.

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