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Western LNG Backers Remain Bullish on Import Prospects

June 2, 2008
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Undeterred by the stagnated global liquefaction development and liquefied natural gas (LNG) cargoes to the United States drying up, several western LNG project proponents stayed bullish in May about the long-term prospects for North America becoming a major LNG importer. Sempra Energy's COO repeated this theme at an energy financial conference, and two major LNG proponents in Oregon told NGI they are not worried despite the recent negative indicators.

There has been a steady decrease and delay in LNG supplies destined for the United States in the coming years, and this is expected to continue, Shell Gas & Power's Executive Vice President for Global LNG Kathleen Eisbrenner told an industry audience at GasMart 2008 in Chicago May 21 (see NGI, May 26). And pipeline alternatives for tapping more Rockies or western Canadian supplies in British Columbia were touting their viability to satisfy future demand growth in the Pacific Northwest.

Ultimately, there most likely will be one new pipeline and one LNG project serving the Pacific Northwest, said Mohammed Alrai, a founder and principal of Oregon LNG, who helped put the original Calpine Corp. Skipanon project together in 2004, during an interview with NGI last Thursday. At least one pipeline project -- Spectra's Blanco proposal -- is no longer seen as viable.

"One of the pipelines is going to get built," said Alrai, but he thinks depending which route and project ultimately wins out will determine how much added costs there will be for new conventional gas supplies."

Oregon LNG's chief competitor, NorthernStar Natural Gas's Bradwood Landing LNG project -- also proposed for the Oregon side of the Columbia River -- is not concerned about the pipelines, according to a Portland, OR-based spokesperson. "We still believe we can offer less expensive gas," he told NGI last Thursday.

"Our pipeline [from the proposed Bradwood Landing facility] will be only 38 miles long, so our transportation fee, compared to a pipeline from the Rockies to Oregon, for example, would be much less."

Last week NorthernStar asked the Federal Energy Regulatory Commission (FERC) to reject state officials' call for reissuing a draft environmental impact report (see related story).

Both projects claim to have strong local support, and Oregon LNG touts the fact that its site near the mouth of the Columbia has already withstood the Oregon land-use appeal process, although it still needs to make a formal application to FERC in the next two months; Bradwood Landing is further along in that process.

Both project sponsors echo what Sempra COO Neal Schmale told the Deutsche Bank Energy and Utilities Conference last Thursday -- namely, the long-term vision for a vibrant North American LNG import business is still very viable, although perhaps pushed back a year or two.

"Given the surplus of regasification capacity that is either on, or coming on, in the Gulf, it is going to be difficult for us or anyone else to sign supply contracts any time soon for the same time period that we were able to set for the initial contract," Schmale said. "Having said that, I would emphasize that our fundamental view of the world natural gas trade has changed very little from what it was when we started this [Cameron, LA] facility.

"We believe when you start with the premise that natural gas is going to be the fuel of choice worldwide for a whole host of reasons, including environmental reasons, and you add to that the decline of the resource base in the United States, the U.S. resource base is not nearly as prolific as the world resource base. That basic geologic situation coupled with the basic economic state of affairs, long term we think the United States is going to need a lot of LNG and what we are seeing now is a delay in when it is going to come in."

Oregon LNG's Alrai said the cost for new supplies from the Rockies or western Canada, factoring in transportation fees, could be in the $7 to $8 range, and he thinks LNG imports in Oregon can compete with that.

"Right now LNG is in a really weird situation [globally] because supply-demand is way out of balance," he said. "Once that equilibrium comes back to the market, LNG will be very competitive to $8 gas in North America because you break even with LNG at $5. Once you take care of the markets that have no pipeline alternatives and no storage [Japan, Korea, Taiwan] then the rest of the capacity that exists in the [global] market is going to North and South America, or China and India. That's when we'll start having real gas-on-gas competition."

The "bottom line" for Alrai is that if natural gas in North America stays at the $8 to $11/MMBtu level, then he is convinced that LNG will come to the West Coast to his project and others. He thinks some of the major global drivers creating the current situation will go away, such as the earthquake in Japan that knocked out 8,000 MW of nuclear power generation capacity last year that had to be made up with emergency, high-priced purchases of LNG. Eventually, the 8,000 MW will come back on line, Alrai said.

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