Texaco, Shell, BG Tout Separate New LNG Endeavors

In keeping with the recent buzz of increased liquefied natural gas (LNG) activity across the country, Texaco revealled last week that it is studying the development of a new LNG receiving and regasification terminal in the U.S. Gulf of Mexico, while Shell International Gas Ltd. said that it has acquired up to 3.7 million tons of LNG from the North West Shelf (NWS) project in Australia for delivery to the Americas. Meanwhile, United Kingdom-based BG Group reported that it recently inked a 22-year contract with CMS Energy Corp.'s subsidiary, Trunkline LNG Co., for all of the current uncommitted capacity at CMS's Lake Charles, LA, LNG terminal.

Texaco said its proposed LNG terminal, which would join Trunkline's terminal along the coast of Louisiana, would be constructed as an offshore facility with initial processing capacity of 1 Bcf/d. The terminal would connect to the company's extensive offshore infrastructure, which Texaco said is currently underutilized due to natural gas production drop off in the Gulf. The regasified product could be distributed to several interstate pipeline systems as well as the Henry Hub.

"The U.S. demand for natural gas continues to increase at a significant pace, demonstrating the need for clean burning fuels for power generation, industrial fuels and residential markets," said Robert A. Solberg, president of Texaco Commercial Development. "The traditional supply basins can be developed to meet this growing demand, and LNG creates an outstanding opportunity to construct new facilities that can deliver this much needed gas supply to U.S. markets."

Texaco said the facility could ultimately be expanded up to 2 Bcf/d to meet further increases in natural gas demand from the U.S. market. The supply of LNG for the terminal would be produced from one or more potential projects in the Atlantic Basin in which Texaco holds an equity interest.

"We are enthusiastic about the prospects for growth of the natural gas business and this regasification effort is part of Texaco's larger natural gas strategy," said Solberg. "Natural gas discovered in areas where there are no local markets is being considered for use as feedstock for projects such as this, targeting the U.S. market."

Shell's purchase agreement for 3.7 million tons of LNG will run over the course of five years from 2004, and will put to use the company's new LNG vessels, including the two LNG carriers recently ordered from Daewoo Shipbuilding and Marine Engineering Company Ltd. and Mitsubishi Heavy Industries, expected for delivery in 2003 and 2004, respectively.

Peter de Wit, Shell Gas & Power's director for Asia Pacific, said, "I am delighted Shell has been able to provide additional markets for Australia's NWS project. The deal will assist the project in its early years and deliver additional value for all. This provides Shell and the NWS with a strong advantage in developing new LNG markets."

Although Shell listed the Americas as the prime destination for the LNG, other markets including ones in Spain and India, through the Hazira terminal, are being considered.

The BG-Trunkline contract, which takes effect in January 2002, will give BG Group the right to 5.1 Bcf of uncommitted vaporization and storage capacity. After another one of CMS's contracts expire in August 2005, BG's stake will rise to 6.3 Bcf. CMS said this transaction, along with other commitments made, will bring total annual revenues from the facility to $450 million.

"This long-term contract with BG solidifies CMS Trunkline LNG's position as the U.S. leader in the LNG industry," said Christopher A. Helms, president of CMS Panhandle Pipe Line Cos. "The agreement fulfills two of our major objectives: to maximize the value of the terminal for CMS Energy and to ensure long-term natural gas supply attachment to our pipelines. This contract also helps to enhance long-term natural gas supply availability for the United States as LNG plays an increasingly important role in the security of the United States' energy supply."

BG Group CEO Frank Chapman said the deal "underpins BG's growing reputation as 'The Integrated Gas Major' by providing significant long-term access to the world's largest natural gas market. The agreement reinforces our LNG portfolio and puts BG in a pivotal position to supply the U.S. natural gas market from our LNG export projects. There are major opportunities in the U.S. downstream gas market which is being targeted as a channel for LNG by a number of producers. Until today, the Lake Charles facility was the only terminal in the U.S. with significant uncommitted capacity."

BG said its newly contracted capacity at the Lake Charles terminal gives the company numerous options, including physical trading of LNG cargoes, using its own shipping resources and down the road, selling its own equity LNG production into the U.S. market.

As natural gas demand continues to grow by leaps and bounds across the globe due to a spike in new gas-fired power generation facilities, worldwide LNG is increasingly being called upon to help keep up the supply. Major oil companies are beginning to benefit from exploiting huge remote gas fields that can produce continuously for as long as 30 years. In the last few months, major players such as Chevron, El Paso, Phillips, BP, Texaco, Enron, Shell and BG Group have all made commitments to the newly revitalized industry (see NGI, March 26; April 30).

According to a recent Deutsche Bank AG report, the only "missing link" in the global LNG market is receiving terminals on the U.S. West Coast, which would allow the pricing of gas on a global basis across all supply basins. "The beauty of the U.S. West Coast concept is that it will take the LNG market truly global, with the deep and liquid U.S. gas market directly impacting both Asia and Europe in terms of price arbitrage," the Deutsche Bank report said.

But putting regasification terminals on the West Coast is proving to be difficult, as El Paso and Phillips have discovered after entering into a deal in March to bring LNG from Australia to California or Baja California, Mexico (see NGI, March 12). Deutsche Bank said California's ongoing energy crisis might ease the approval process considerably.

Deutsche Bank believes the LNG industry is moving from a regional take-or-pay structure into a spot market offtake with the majors positioning to tie up supply contracts as a means of launching expansions or new projects. The firm believes the LNG market is changing from an Asian, long-term, fixed contract, indexed price industry, based on rigid capital repayment schedules, to an Atlantic Basin, flexible, open, price risky, traded commodity market.

As for the LNG boom, the firm believes it has already occurred because the investments were made during the 1995-to-2000 period. "We actually expect a slowdown in capacity additions from the period 2000-2005," the company

The firm listed Royal Dutch/Shell as the "dominant player" currently in the LNG industry, with global exposure throughout the supply-demand chain. Shell controls projects in Asia, the Middle East and Atlantic Basin, and has the "highest gas production and equity regasification capacity of any company." Shell currently produces about 2.5 Bcf/d.

"In the near term, Shell appears to have the best LNG mix, and TOTAL has excellent growth rates," Deutsche Bank said in the study. "Exxon has historically made the best profits from the business. BP is making an aggressive play on spot market-linked growth. Mid-ranking majors such as ENI, Chevron, Phillips and BG are all pursuing a step increase in their exposure to this increasingly global gas market."

As feasibility studies and memorandums of understanding targeted at retaining the remaining guaranteed buyers, and new gas supplies, continue to spring up, Deutsche Bank said indicators are everywhere. "Examples include the rush to buy IPO equity and to build LNG terminals in China (led by BP), Indian schemes (Exxon, Shell, TOTAL and BG), new upstream plants in Venezuela and Egypt, and plans to build new LNG terminals in the U.S. (Chevron, Texaco, BP, Phillips, El Paso and Enron)," the report said. "At the same time, new non-oil entrants such as Union Fenosa are pushing into the market. In our view, Shell looks set to retain its global lead, but faces strong challenges, notably from BP."

After BP moved away from LNG in the mid-1990s due to disappointing returns, Deutsche Bank said the company's recent refocusing on the industry is a reversal of position, and a new direction that BP is "pursuing with the zeal of the converted." BP, which is developing large natural gas reserves off Trinidad, said earlier this month it is considering siting an LNG terminal in the port at Tampa, FL (see NGI, May 14).

Despite the potential for oversupply in the global LNG market, Deutsche Bank said it seems certain that "demand growth will be extremely strong." It also believes that a staggering 37,000-40,000 MW of gas-fired power generation will be added in the U.S. in 2001, which will place competitively priced LNG in a strong position to help meet the new demand.

Texaco said the four existing U.S. LNG receiving terminals are almost fully contracted, which creates the need for new import facilities. Its proposed facility could be operational in four to five years. The Texaco terminal study is being conducted over a six-month period and is expected to demonstrate that by creatively accessing and utilizing existing infrastructure in the Gulf area, where traditional supplies are in decline, the project would have minimal environmental impact.

Shell said the key commercial terms of the Shell/NWS deal have been agreed upon, and the final sales and purchase agreement is expected to be concluded over the coming months. The purchase will assist the NWS project in its early years through enhanced cash flow and the flexibility to develop markets. Shell said the NWS project has already secured firm sales with a number of Japanese buyers. The North West Shelf consortium consists of Woodside, Shell Development Pty. Ltd. (Australia), MiMi, Chevron, BHP and BP.

CMS said the Lake Charles terminal, which is the largest operating North American terminal, currently receives gas from Europe, Africa, Asia, South America and Australasia. Future imports could come from developing or expanding LNG export projects in Angola, Egypt, Nigeria, Norway, Trinidad and Venezuela.

BG currently holds a 26% share in the Atlantic LNG Co. in Trinidad, which produces 3 million tons of LNG per year for export to Spain, Puerto Rico and the United States. The company said there are an additional two trains under construction that will boost LNG production to over 9 million tons a year. The company is also currently involved in an agreement with the Egyptian General Petroleum Corp. and ENI of Italy for an LNG export project, which will be headed by a new company, Egyptian LNG. The new company will build, own and operate a liquefaction plant with the first train due to come on stream in 2005. BG said the United States is being targeted as a potential market for the new endeavor. In addition, BG said it plans to play roles in projects in Indonesia, southern Italy and India.

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