With its abundant natural gas storage capacity, North America is viewed by many as a sink for liquefied natural gas (LNG) cargoes that can't be sold in Asia or Europe. But now that new LNG liquefaction capacity is poised to come onstream later this year and next -- in the midst of a global economic downturn -- the industry is wondering where all the cargoes will go.

"If global demand declines and liquefaction projects come on-line as scheduled, neither the U.S. nor Europe would be in a position to take all excess LNG volumes in the second half of 2009," analysts at Barclays Capital wrote in a research note last Tuesday. "Thus we expect relative pricing to reflect the need to balance LNG flows between Europe and the U.S. later in the year."

The analysts noted that prices at the United Kingdom's National Balancing Point have sunk but still offer a premium to Henry Hub. "[T]he differential has narrowed to where some Atlantic Basin volumes should flow to the U.S. instead of Europe starting mid-2009.

"...Europe's ability to absorb LNG supply above and beyond its immediate needs could hold the key to how much LNG lands at the U.S. shores in the second half of the year."

The LNG industry has a history of missing targets for new liquefaction capacity, and a number of trains in operation have been beset by problems and are not operating at full capacity. Nevertheless, if the industry's plans come to fruition, 2009 could see a record number of liquefaction facilities, growing nameplate capacity by 5.6 Bcf/d in a roughly 23 Bcf/d global LNG market, the Barclays analysts wrote.

Nigeria, for instance, could triple its output of LNG in a few years if projects slated to come on-line do so as planned, according to the head of Nigeria LNG, as reported last Wednesday by Reuters.

Whatever capacity does come on-line will be arriving at the worst possible time from the standpoint of the global economy. The analysts concede that "the range of possible outcomes for global balances is unusually wide." However, they wrote that a net decline in European and Asian demand for LNG this year appears to be likely. "Our estimates indicate that if European consumption decreases by 5% y/y [year over year], and Asian demand falls by 10% in H209, the resulting surplus LNG output would be roughly 1.3 Bcf/d in Q2, 2.9 Bcf/d in Q3 and 4.2 Bcf/d in Q4 y/y," the analysts wrote.

According to data compiled by Tudor, Pickering, Holt & Co. Securities Inc., sendout from U.S. LNG facilities has been averaging 0.9 Bcf/d so far in February compared with about 0.8 Bcf/d a year ago. In the fourth quarter the average was also 0.9 Bcf/d as it was in the fourth quarter of 2007, the firm reported last Monday.

"For 2009," the Barclays analysts wrote, "the magnitude of the expected growth in supply, coupled with the sharp demand deterioration, means that a single regional LNG market is unlikely to be able to absorb all of the excess volumes, particularly in the case of a global demand decline.

"[T]he U.S. with its large storage base and flexible pipeline infrastructure could serve as a point of last resort for orphaned LNG cargoes. The trouble is that U.S. balances are also looking rather plush for the second half of the year, and incremental LNG imports threaten to depress prices even further."

While the Gulf Coast region offers the most gas storage capacity for prospective LNG imports, the East Coast offers the highest netbacks, and that's where the influx of LNG will go, at least at first, according to Jimmy Straughan, vice president for gas Americas for BP Global Gas. "I would be surprised if the majority of the incremental LNG that comes to the U.S. doesn't enter via these East Coast facilities," he told attendees at Platts annual Liquefied Natural Gas Conference in Houston last week.

Before those LNG tankers come to the U.S., though, they will have called at ports in Europe, Asia and Latin America. They'll head to the United States, and its abundant gas storage capacity, once those markets reach "relative saturation, which in today's market does not take long, given the global economy," said Waterborne Energy Inc. President Steve Johnson.

"The sellers [of LNG] are doing everything in their power to exhaust potential outlets before ultimately capitulating to the market of last resort, the U.S. We're starting to see the largely spot players, such as BG, starting to term up spot supply. That's a huge indicator...BG's primary fallbacks are Lake Charles in the Gulf [of Mexico] and Elba Island. It will be interesting to see how much volume actually makes it there. The most prolific trader in today's spot market, BG has already sold 80% of their 2009 volume and 75% of their 2010 volumes."

Johnson noted that Asia and to a lesser extent Europe are struggling to absorb contracted volumes of LNG. Meanwhile, global liquefaction capacity is under producing by about 60 Bcf/month due to recent outages in Nigeria and Algeria.

Waterborne is forecasting average U.S. LNG imports during 2009 of 3.2 Bcf/d. "The only real variable here is the timing of new liquefaction projects," Johnson said.

But those who believe that the United States will be blessed/cursed with an abundance of LNG for years to come should remember their recent history and the import declines witnessed last year.

"The facts keep changing, and we have to keep adapting, and the facts around LNG and long-term demand have changed, and we have to adjust, but they'll change again," said Straughan. Johnson expressed a similar sentiment.

"This is simply part of a cycle," he said. "The market will tighten up again in a couple of years and U.S. imports will dry up. There will be those questioning again the viability of the very existence of LNG import facilities in the United States."

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