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LNG Cavalry Late to the Rescue, Analyst Says

Those counting on an LNG bail-out to moderate natural gas prices along about 2007-2008 might have to wait a little longer, according to a report just published by Schroders plc, a global asset management company, whose latest report on North American natural gas markets sees prices remaining at high levels beyond the end of the decade.

"Compared to our outlook for oil prices, U.S. gas prices look set to outperform." Prices in the out years will moderate slightly, but not to consensus levels, the Schroders report says. It sees natural gas prices peaking at $8.25/Mcf in 2005, then staying at $7.50/Mcf through 2006-2008, dropping to $6.75 in 2009 and $6.00 in 2010. The group said its assumptions are 12% above consensus for 2006 and more than 25% ahead of the Street for 2007 and 2008.

The report, "LNG to the Rescue...Just Not Yet" sees regasification terminals eventually overcoming their local adversaries only to face a highly competitive world market for the LNG to supply the plants. The fact that some midstream terminal sponsors have agreements with upstream producers for some, but not all of their capacity, raises questions as to their projected start dates. Projects lacking total upstream molecules include two plants in the Bahamas, Tractebel and AES Ocean Energy, Sempra's Cameron plant in Louisiana and Cheniere's plant in Corpus Christi, TX, Schroders says.

And even those projects with majors for upstream partners are not guaranteed. Despite its agreement with Cheniere to use some of the capacity at the proposed Freeport, TX, LNG facility, which is due online in mid-2007, ConocoPhillips' upstream project in Qatar to develop that supply still has not been approved by company management, the Schroders report said.

Also, supplies to fill capacity rights at Cheniere's planned Sabine Pass facility in Louisiana (2008), pledged by Chevron and Total, are not likely to be available until a year later than planned. As a sidelight, the report notes that Chevron's Port Pelican offshore import terminal may have gone back to the drawing board to resolve high cost issues.

Increasingly the LNG market is becoming a spot market. Since natural gas has to compete with oil products in European and Asian markets, that generally means those markets will pay more for LNG. Despite what the U.S. considers high prices this year, only 46% of its current regas capacity at the four plants currently operating has been used, Schroders points out.

Absent a recession, Schroders sees U.S. supply/demand slowly edging up from 61.6 Bcf/d (22.5 Tcf/year) in 2005 to 63.29 Bcf/d in 2008, and 66.09 (24.12 Tcf/year) in 2010. The forecast sees demand growing in all sectors except industrials, which is expected to drop from 22.4 Bcf/d in 2005 to 21.9 Bcf/d in 2010. It projects LNG imports slowly edging up from nearly 2 Bcf/d currently to nearly 3 Bcf/d in 2007, 5.4 Bcf/d in 2009 and 8 Bcf/d in 2010.

Schroders, based in London, has offices in 26 countries. See www.schroders.com.

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