As a relatively new buyer in the world liquefied natural gas (LNG) market, the United States is like a fish out of water, with North American buyers and sellers used to doing business in an efficient domestic spot market while the rest of the world, with a utility mind-set, signs long-term, take-or-pay contracts (remember them?) for gas pegged to the price of crude oil.
Most European and Asian buyers, having few alternatives, will pay whatever it takes to keep the lights on, LNG industry representatives told commissioners at the Federal Energy Regulatory Commission's (FERC) "State of the Natural Gas Industry Conference" last week.
This effectively shuts out much of the LNG import trade here during the peak winter season, especially with the current wide oil-gas price differential. Right now the U.S. market is the "dumping ground, the last resort market" for LNG, according to Richard Grant, international chief executive, Suez Energy International. And, it's not just the price, Grant said. The Japanese, for instance, will pay whatever is necessary to get the gas, as they did earlier this year when one of their major nuclear generating plants went down.
The LNG executives had high praise for the "unparalleled" efficiency, liquidity and transparency of the U.S. natural gas market, but said unfortunately there's nothing that even approaches an active trading market in the rest of the world. The LNG market was built and is dominated by the Asian market, notably Japan, which has no indigenous energy resources; Europeans also bought into it early on.
With excess regasification capacity around the world, it's very much a sellers' market, and there's just not much of a contest between an $8/MMBtu Henry Hub price and a $15/MMBtu oil equivalent price. The good news is that because of this nation's large amount of gas storage capacity, U.S. buyers can snag a considerable share of the lower-priced, off-season LNG cargoes and hold the gas in storage for the peak season.
Since much of the LNG regasification capacity is in the Gulf of Mexico, that means there still is a need for pipelines to deliver to the eastern megalopolis during the winter.
In opening the conference last Tuesday FERC Chairman Joseph T. Kelliher said utilities, recognizing the reality that "North American gas production is inadequate to meet North American demand," should be encouraged to sign long-term contracts for LNG. FERC has done its part by approving LNG terminal siting. It's up to state regulators to "provide sufficient regulatory certainty" so local distribution companies can sign up for secure supplies.
In what he called a harbinger of things to come, Zach Allen, managing director of the advisory firm Pan EurAsian Enterprises Inc., pointed to a low level of LNG imports into the U.S. in January and February this year, ratcheting up dramatically from March through August before dropping again in September and October.
Other LNG importing countries don't have much storage capacity and can't compete for excess summer supplies. The entry of the United States into the market has "introduced a liquidity into the LNG market that it never had before," Betsy Spomer, senior vice president Western Hemisphere LNG, BG Group plc, said. She said when the Asians didn't need the gas immediately, they wouldn't take it even if it was free. The balancing function now being provided by U.S. demand is a "great boon" to the world LNG market.
Even the old disconnect between the Atlantic and Pacific basins is breaking down. Spomer said she expected to see almost a Bcf/d of Atlantic Basin gas going to Pacific markets this winter. She quoted from a recent Goldman Sach's natural gas update: "What Asia wants, Asia gets."
While some U.S. regasification terminals, such as Everett, MA, which has been bringing LNG into New England for decades, and Elba Island, GA, do have long-term destination contracts, others, such as the LNG terminal in Lake Charles, LA, where BG manages the gas flow, are trading terminals. Spomer said she didn't have long-term contracts for the sale of gas coming into Lake Charles, because "we don't need them." The Gulf of Mexico LNG receiving terminals are the ones that provide the liquidity because their customers have ready access and can switch to storage and pipeline gas.
The actual spot market is very small, Grant said. He pointed out that gas that is diverted from one terminal to another by the same owner, currently is counted as spot market gas when it really isn't because no buy/sell transaction has taken place.
The panelists commented on a growing phenomena, flex-destination contracts, that have the appearance of a long-term contract, but in reality will to to the highest price market. (A speaker at the LDC Forum in California last week discussed the new flexible contracts in more detail, see separate story).
Questioned by Kelliher on the role of national oil companies (NOC), Spomer said they are playing a larger role in the LNG trade with more interest in having a hand in the downstream part of the market. They also have a strong influence on development of gas resources, Grant said. Rather than calculating as U.S. producers do on a net present value basis, the companies are influenced by the politics and budget of the country that owns them. They may figure they have enough revenue coming in and will hold some resources for future development. "There's a lot of gas around the world that's not coming to market," Grant said.
The international LNG executives commented on the cultural difference between the U.S. and other parts of the world over the safety of LNG facilities. Outside the U.S., LNG is regarded as just another form of energy and treated as such without an over-emphasis on special security concerns.
Patricia Outtrim, vice president of Cheniere Energy, said opposition in the U.S. to LNG siting isn't about security; it is the same reaction that would attend any attempt to install any industrial facility in a populated area.
Allen said the situation should be looked at in terms of the competing use of assets. It is quite different to attempt to site an LNG terminal in New England's Narragansett Bay, which is used by a large population for recreation and fishing, compared to the Gulf of Mexico, which has less populated areas where many oil, petrochemical and other facilities already are located.
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