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Could New England Be in LNG-Induced Supply Glut in Five Years?

September 19, 2005
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While New England may have some gas delivery concerns this winter because of production shut ins in the Gulf and no growth in Sable Island production, the region may be struggling through an oversupply situation between 2008 and 2010.

Strategic Energy and Economic Research consultant Ron Denhardt predicts that Gulf Coast/Gulf of Mexico gas production will be flat over the next five years, with onshore growth offsetting offshore Gulf declines. Meanwhile, at least 3 Bcf/d of additional liquefied natural gas (LNG) will be arriving at new and existing import terminals in the Gulf.

In Atlantic Canada, two LNG projects, Anadarko's Bear Head terminal in Point Tupper, NS, and Irving Oil and Repsol's Canaport terminal in St. John, NB, are making significant progress toward service in 2008 with about 1.6 Bcf/d of supply earmarked for the Northeast.

"That's a substantial incremental supply increase for the eastern United States over the next few years that will dramatically alter gas pipeline flows and will probably drive down gas prices," Denhardt said, predicting prices would fall to between $4/MMBtu and $5/MMBtu by 2010. "Remember New England only consumes 2.5 Bcf/d."

However, he said the impact on market prices and the high cost of dealing with infrastructure issues downstream of Dracut, MA, on the Northeast pipeline grid may end up forcing some LNG supply delays.

"Dracut [the interconnect between Maritimes & Northeast Pipeline and Tennessee Gas] has capacity for 600 MMcf/d," he noted. "Even if you expand receipt point capacity there, you can't take all that gas in New England." Some will go to Boston on Algonquin via the Hubline project and Maritimes extension. But a lot of gas also will be coming up from the Gulf at the same time. "Net Gulf supply is going to be up about 3 Bcf/d."

How is the transportation system going to accommodate all this new supply coming from both directions, and who will pay for the pipeline upgrades? he asked.

Before tackling that issue, however, LNG terminal developers will have to track down enough supply on the world market, and that may not be easy given demand growth in Asia and competition with Europe. "I don't think there is enough LNG [liquefaction capacity worldwide] for the two Canadian LNG projects to come on simultaneously," said Denhardt. "They might come on within a few years of each other."

Despite these issues, however, Anadarko and Irving Oil/Repsol are pressing ahead with construction simultaneously. The initial phase of construction on the Canaport terminal already has begun, sponsors said earlier this week. Site clearing was completed in May 2005 and the initial construction phase will involve site excavation and leveling in preparation for full-scale construction. Front end engineering design for the project is complete, and Canaport LNG issued a request for proposals for engineering, procurement and construction (EPC) earlier this summer. Onshore construction is scheduled to begin in Spring 2006.

The $445 million Canaport terminal will be located adjacent to Irving's 250,000 bbl/d Canaport refinery in St. John, about 65 miles from the U.S. border and will have capacity to store 480,000 cubic meters of LNG.

Spain's Repsol is a major player in the global LNG business and will be responsible for providing all of the LNG to Canaport. It also will hold the capacity at the terminal and will market the supply that Irving Oil does not use at its refinery. Repsol signed an agreement earlier this summer to transport 750,000 MMBtu/day on the Maritimes system. However, it still has not identified the source of the LNG supply.

Anadarko also has not identified a supply source. "[Bear Head] looks very real [given the contracts] but they don't have any LNG supply," said Denhardt.

Nevertheless, that didn't stop Anadarko from singing a long-term firm transportation agreement with Maritimes earlier this year to bring 813,000 Dth/d of gas to markets in the Northeast. The company also signed an agreement with CB&I last month for construction of its storage tanks.

"We still hope to make an LNG supply agreement public before the end of this year," said Anadarko Canada spokeswoman Nadine Barber on Thursday. "And we hope to begin pouring concrete within a few weeks."

Barber questioned Denhardt's projections on incremental LNG flows to the Northeast from the Gulf Coast. "There is not sufficient pipeline capacity to get all the LNG supply to the Northeast [from the Gulf Coast] right now," she noted. Besides, the LNG that is coming into the Gulf is "really going to just replace the shallow water production declines that already are [taking place]. So we don't expect there to be [3 Bcf/d of incremental supply headed to the Northeast.].

"It also still appears that there is a growing market in the Northeast, and if you add in that increased demand with Sable [production] declines, for instance, we think we are still in an excellent position to capture a good share of the market."

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