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Sempra CEO Expects LNG Imports to Reduce Gas Prices to $4 by 2008

With gas demand growing about 2-3%/year and gas supply struggling to meet demand, high gas prices should continue until liquefied natural gas (LNG) imports begin significant growth in 2008, Sempra Energy's CEO Steve Baum told Wall Street financial analysts Tuesday in New York City. Prices probably won't soften until 2008-09, Baum said.

"Our view is that the prices will fall into the $4 range" after 2008 when some significant new increments of LNG come into the U.S. market, said Baum, who will retire the end of January next year. He told analysts he was proud that Sempra's stock price has more the doubled since he took the helm five years ago. He acknowledged that there are "many factors that could affect" the company's outlook.

"The demand for gas and the high prices are principally driven by electricity production, so if there were a shift in policy in the United States back toward nuclear or coal, that would mitigate the demand for natural gas and could lower the price. We also could have an economic downturn, but what we see is that none of those things is likely to occur.

"We do think there will be significant quantities of LNG moved to market, with the $5 to $6 price existing out until 2008 and then declining modestly back toward $4... Our view is that LNG can enter this country with gas prices on a present-value-dollar basis of about $2.50-4/MMBtu. That is enough to encourage the investment upstream in natural gas and LNG production and liquefaction."

Against this set of assumptions, Baum cited the example of Sempra's $1 billion Energy Costa Azul LNG receiving terminal now under construction along North Baja California, Mexico's Pacific Coast. He said there is up to $7-$8 billion invested in LNG ships and production/liquefaction infrastructure upstream of Sempra's terminal.

Once the upstream money is invested, the gas will flow, "even if prices (in the United States) fall further than I have predicted," Baum said. "Our view is that gas flows once the investment is made until it gets down to squeezing variable costs of production." Thus, the gas prices encourage the investment, and once the investment is made, the gas prices keep the gas flowing but gradually move lower, Baum said.

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