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Consultant: U.S-Bound LNG Will Have to Limbo

For liquefied natural gas (LNG) producers looking for a market, the question from the United States is "how low can you go?" Well stocked with shale gas and other unconventional supplies, the U.S. can afford to spurn LNG imports unless the price is right.

Those with LNG to sell that are willing to forego recovering their cost of capital -- and if they're desperate to place a cargo, some might be -- might have to settle for a price at the regasification terminal tailgate as low as $1-2, said Chuck Yost, president of Merlin Associates, a Houston-based engineering consultancy. "They're only looking at what they have to get to pay for the operation of the plant and their ongoing minimum capital investment...If they are desperate -- and desperate might mean they have no other opportunities -- the lower limit of pricing is very low," Yost told Platts Liquefied Natural Gas Conference attendees recently.

A less desperate seller -- one seeking a 15% rate of return and recovery of costs from the upstream through shipping as well as regasification terminal throughput charges only -- could be willing to settle for $2.83-$6/MMBtu. "Today's price is $4.50, right in the middle of that," Yost said. Domestic shale gas, he noted, can be produced economically at wellhead prices of $3.50-7.50/MMBtu, depending on reservoir characteristics.

Potential LNG sources for the United States include Trinidad, Nigeria, Egypt, Qatar and Norway, among others. Trinidad's liquefaction started construction in 1996, while the first Nigerian train came on-line in 1999, Yost said. Qatari liquefaction also dates back to 1999, while Egypt's liquefaction started up in 2005. Norway saw its liquefaction come on-line in 2007. New projects just coming on-line are at a significant disadvantage to established liquefaction when it comes to cost recovery, Yost observed. "A lot of this new capacity, if it comes into the United States, it's going to be doing so at a significant penalty to the sponsors involved in the project," he said.

If that's the case, ExxonMobil might be pleased that its Golden Pass regasification terminal on the U.S. Gulf Coast is now expected to come on-line in 2010 rather than this year, as a company executive told financial analysts last week.

Like most in the industry, Yost said the United States will be the market of last resort for LNG producers for the foreseeable future. However, whether the market becomes appealing enough to land cargoes compared with the rest of the world remains to be seen. "India is very close to the Qatar LNG supply and could easily provide more in netback to the LNG sellers who would not have to deliver it all the way to the U.S," he said. "Similarly, China is much closer than we are and could also buy the LNG, providing a much higher margin to Qatar but at the same or lower than U.S. pricing."

Yost told NGI he believes both India and China are trying to strike long-term contracts with Qatari LNG producers at reduced prices. "But I anticipate the very business-savvy Qataris to only conclude short-term contracts so as to maintain their price flexibility when the market eventually recovers.

"From the U.S. standpoint...our gas prices are being largely established by our own production, and shale gas is driving them lower and will continue to do so for quite some time. I would be very careful about investing further in U.S. LNG import terminals in the near term."

After all, it's not as if we didn't have plenty of regasification capacity in the United States already. "The [U.S.] import terminals could handle approximately 62 million tons a year in their full capacity as currently installed, not taking into account any terminal that's not yet operational," Yost said. "That includes Sabine Pass and Freeport but none of the other terminals along the Gulf Coast."

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