It may be nearly impossible for a second West Coast liquefied natural gas (LNG) terminal to pencil out economically compared to expansion of the 1 Bcf/d Costa Azul facility Sempra Energy plans to open along the Pacific Coast of North Baja California in the first quarter of next year, Sempra's CFO Mark Snell told the Lehman Brothers CEO Energy/Power Conference last Thursday in New York City.
Snell said he definitely thinks the new injection of globally traded gas "will put downward pressure on prices." But he cautioned that "a lot of things are happening in the West that will need to play out to see how the market reacts."
While the start-up capacity at the $875 million project 60 miles south of the U.S.-Mexico border is nearly fully contracted, it is being built to expand in increments up to 2.5 Bcf capacity, said Snell, noting in response to a question that there is no additional source of gas at this time that Sempra is negotiating to bring through the facility.
However, to get to the much larger capacity could cost only about 50-75% of Costa Azul's first phase costs. Pipeline takeaway capacity and cooling water input capacity at the plant will be sized for an eventual 2.5 Bcf facility when the terminal opens next year, Snell said.
The shear volume of 1 Bcf/d of additional gas in the region has to have some dampening effect, Snell said. "The West has benefited [in recent years] from the fact that Rockies gas really has had no other home other than the West, and [Sempra's joint venture] Rockies Express Pipeline will help bring gas East and create another alternative.
"On the West Coast there has been a lot of talk about additional LNG facilities," Snell said. "A lot of the talk is whether another terminal could be permitted and whether it would be offshore or onshore, in Oregon or off California.
"But given where Costa Azul is and given that the first billion-cubic-feet of gas [daily] is already spoken for, no matter where another facility is proposed, the expansion capability of Costa Azul will be cheaper than any offshore or onshore facility, or almost any combination you can come up with for bringing additional LNG into the California market."
Snell said the expansion is looked at as a three-phase process: 1.5 Bcf would require just an additional tank; to go to 2 Bcf would take the added tank and "a little bit of internal piping;" and to go to 2.5 Bcf would take two added tanks and probably additional ship berthing facilities.
"We haven't priced out the added construction, but given where steel and construction costs have gone, and assuming they don't come down appreciably, we would expect the cost to be half to 75% of what it would cost us to build a new facility," he said.
On price considerations, there are two counteractive developments -- more gas from LNG shipments, and less westerly heading gas from the Rockies -- that might offset one another in terms of their price impact, said Snell, who noted that Sempra is seeing declines in supplies of Canadian gas that Pacific Gas and Electric Co. (PG&E) has relied on historically.
"They're [PG&E] facing declining production and also the fact that a lot more of that gas in Canada is being used in enhanced oil recovery [in Alberta], so the amount of gas available to California is going down quite a bit. We think now that actually the timing of our facility is terribly close to when all of these events come to be.
"Having said that, the LNG may not have as much of a downward pressure as we originally anticipated, but the hope was when we built this facility that we would put some downward pressure on pricing and preserve the option of clean-burning fuels for California."
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