The conventional view is that liquefied natural gas (LNG) imports in the coming years will set the price for natural gas, however, even in the most optimistic scenario, LNG imports of 0.5 Bcf/d per year will at best only offset the decline in North American supply, according to an analysis by Southwest Securities’ John Gerdes.
Gerdes noted that an analysis of projected LNG growth imports “has potentially significant implications for U.S. gas supply and therefore, U.S. gas prices. Should North American supply deteriorate by more than 0.5 Bcf/d per year, the U.S. gas market will need to continue to rationalize demand, thus placing upward pressure on gas prices and implying that our long-term $4.75/MMBtu gas price is decidedly conservative.”
Even with only “reasonable visibility” through 2006, Gerdes said that it appears that LNG import growth in 2007 and 2008 — excluding potential cargos to Mexico that would mostly be dedicated to the growing market there — “will increase no more than 0.5 Bcf/d per year.” Given current LNG imports of about 1.5 Bcf/d, “U.S. second-out capacity does not appear to be constraining growth in LNG imports.”
The focus, said Gerdes, has been on LNG import capacity, but the actual long-term limiter of LNG import growth to the domestic market appears to be liquefaction at the gas source. Southwest Securities’ expectation is that “up to 50% of Spanish contracted cargos out of Trinidad and Tobago are likely to be diverted to the U.S. market. Furthermore, the predominance of smaller short-haul vessels associated with the Algerian LNG trade implies that continued vessel construction is required to support growth in Algerian shipments to the U.S.”
Several countries are in the process of constructing more liquefaction capacity, Gerdes noted, and the contributions from a train in Nigeria and one in Trinidad and Tobago “are evident in the increased LNG liquefaction available to the U.S.” There also is a planned 2007 start up of an LNG train in Equatorial Guinea, which is expected to help grow U.S. LNG imports.
“That said, the majority of proposed LNG projects slated for startup from 2005-2010 serve either the predominant Far Eastern or growing European market, and therefore do not contribute significantly to growth in U.S. LNG,” said Gerdes. Even if LNG growth offsets the decline in North American gas supply, Gerdes noted that the clearing price in the power market, combined with an “already efficient gas-fired generation heat rate, implies a demand neutral gas price of $4.50-$5.50/MMBtu.”
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