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LNG Doubts Grow in West; Demand Down, Supply Up

Natural gas forecasters at the California Energy Commission (CEC) continued Monday to present a 2009 outlook that is short on demand growth and long on increased domestic supplies. A month after talking about decreased industrial gas demand last year, the estimates have gone down further from 2.2% to 2.4% as a projected drop, the CEC analysts told NGI.

An indicator of the state's flat gas demand was cited in a state Energy Action Plan update meeting early in December. CEC analysts cited statistics putting 2008 liquefied natural gas (LNG) import totals nationally at about half of their 2007 record levels and the delay in the start of significant commercial LNG shipments until late in 2009 for Sempra Energy's Costa Azul terminal along the Pacific Coast of North Baja California, Mexico (see NGI, Dec. 15, 2008).

Based on federal Department of Energy (DOE) statistics, the CEC sees a sinking gas demand as a direct result of the sagging economy -- globally and nationally. "Every month when the EIA [federal Energy Information Agency] updates its projections, for the last few months the projected decline in industrial gas demand has slowly edged upward to where it was estimated to be 2.4% for 2008 in the December EIA outlook," said Randy Roesser, a CEC energy specialist tracking natural gas.

While the continuing sagging demand and relatively robust domestic gas supplies -- even given the economic slowdown's negative impact on drilling activity -- would make further western LNG terminal development more problematic, Roesser and another CEC gas analyst, Jim Fore, drew short of writing off LNG as an "option," noting it probably still has to stay on the table, while not having much traction in the short term.

"Domestically, if you look at the explosion of unconventional natural gas, the Rockies continues to produce a lot of gas, and the Barnett Shale in Texas, and other shale developments have dramatically increased domestic supplies, and certainly potential supplies have increased," Roesser said. "And all of this growth comes after an eight- to 10-year period where there was no growth in domestic production."

He cited national growth estimates for 2008 in U.S. natural gas production in the 5-6% range, and that is the case even after factoring in the 13-14% drop in production in the Gulf of Mexico because of the two major hurricanes last year. For 2009 that production growth is projected to be far smaller (just short of 1%) due to the ongoing economic downturn, Roesser said.

Roesser and Fore said all three of the major additional pipeline capacity projects for bringing more Rockies supplies to California and the overall West Coast markets are growing increasingly attractive to customers and financial institutions. If either the Ruby or Sunstone pipeline projects is built, it will preclude the need for an LNG terminal in Oregon, Fore said.

"I think it is a pretty good guess that at least one of the pipeline projects is going to forward," said Roesser, who also noted that any supply source -- LNG or not -- could and should be a valuable piece of the puzzle. "There are a lot of factors in play regarding LNG, particularly regarding global prices."

The CEC does not factor in potential LNG facilities in Oregon and other West Coast locations, but Fore said if either Ruby or Sunstone pipelines get built, the LNG terminal plans in Oregon would probably be unnecessary. "[A new pipeline from the Rockies} would limit any LNG coming into Oregon because it would back gas out of the state's supply," said Fore, who thinks only one of the pipelines will be built. "I don't think the market can handle both of them without driving the price way down."

A Portland, OR-based spokesperson for NorthernStar Natural Gas' Bradwood Landing LNG project in Oregon said it is uncertain whether either of the proposed pipelines, which he said now have $3 billion price tags, will ever get built. In any case, Bradwood Landing has an advantage of delivering directly into the load centers in southwest Washington state and the Portland metropolitan area, the spokesperson said.

Roesser said the whole LNG market globally is "incredibly volatile." In addition, he said there is more serious thought in the gas industry now about exporting some U.S.-based gas as LNG. "That is all going to have to be worked out as we proceed and more unconventional supply is actually developed and begins flowing in the supply basins."

The CEC officials agreed that for the 2009-10 period getting more LNG receipt capacity online will be very unlikely. The one development that may occur later in the year and into 2010 is that more LNG liquefaction capacity worldwide is expected to come online, and with the receipt and storage capacity that the United States has there could be an upswing in spot shipments of LNG to take advantage of global prices that may be down compared to current and recent past levels, Roesser said.

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