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Experts See More Competition for North American LNG Supplies

Liquefied natural gas (LNG) imports are forecast to be about one-fifth of the U.S. gas supply by 2025, but North American markets will face several domestic and global challenges going forward, industry experts said last week. Among other things, U.S. buyers will have to compete a lot more for nearby Atlantic Basin supplies and will find access issues a continuing challenge.

Speaking at Strategic Research Institute's Sixth Annual LNG: Economics & Technology conference in Houston last Monday, American Petroleum Institute (API) senior economist Sara J. Banaszak said even with the recent pullback in gas prices, most forecasts indicate a sharp rise in higher-priced LNG imports over the next 20 years. Flattening or lower Canadian gas imports and declining domestic production make LNG one of the only viable solutions going forward, she said. Even if the Alaskan and/or Mackenzie Delta gas pipelines are completed within the next seven to 10 years, they will only help overcome a very small "sliver" of needed gas supply.

"What distinguishes the United States from the rest of the world is the tremendous use of natural gas for industrial production," said Banaszak. "LNG is used for power generation in other parts of the world." Here, she said, it's more of an "industrial swap." And because of high industrial use and expected gas-fired power generation growth, North America will be competing for LNG more in the years to come.

"We are assuming off limits stay off limits," she said, referring to untapped recoverable domestic gas resources, such as a ban on drilling in the eastern Gulf of Mexico. Overall, API estimates about 40% of U.S. gas resources are restricted. estimated by API at 40%. If consumers and the government decide to open more areas for drilling, it could impact how fast LNG imports. "The point is, addressing 'off limits' could impact the market going forward."

Most U.S. LNG imports now come from Trinidad, but unlike oil, LNG comes from a variety of sources worldwide, ensuring its security and reliability, Banaszak said. But the United States competes with the rest of the world for LNG, even in nearby Trinidad, the current leader for U.S. imports.

Speaker Jake Dweck said understanding access development issues across the globe will continue to challenge importers. Dweck chairs the LNG Group for the law firm Sutherland Asbill & Brennan LLP.

"Each significant LNG player in this competitive environment has to learn all of the regulations, access rules and contract rules in the United States and Europe," he said. "I can't overemphasize how critical it is for all of the significant players to be aware of the rule everywhere."

Atlantic Basin markets are increasing about as rapidly as those of the powerful Pacific Basin, which still controls most of the global LNG. "The Pacific Basin supplies dominated supply growth until 1996, accounting for 72% of supply at that time. They have now fallen back to 51%," he noted. "The Middle East and Atlantic Basins are now growing the most rapidly," with U.S. imports a major factor.

The LNG trade also is affecting short-term LNG sales, he said. Short-term volumes are still small -- they accounted for about 1.4% of the market in 1992, and in 2001, they'd grown to about 7.5%. However, Dweck pointed to a study by Jensen Associates which indicates short-term volumes now account for 11.2% of LNG sales.

The growing role of short-term spot market imports, and a growing arbitrage between the United States and Europe "are making the markets more codependent." Eventually, he said. European markets could be using Henry Hub gas prices to set the market.

"There's a tendency to price contracts to the U.S. market, with contracts containing certain clauses to allow them to divert to other markets. It makes Henry Hub the price point, and leads to more interdependence between the United States and Europe."

Long-term, or 20-year contracts, will "indeed be the cornerstone" of the marketplace because they provide the financing, said Dweck. "However, I see a trend for uncommitted capacity retained for the upstream side." Once more open access regasification terminals are completed, "we're going to see the U.S. regasification capacity at 50-60%, with the rest available for short-term trades, with market-competitive contracts."

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