The "great shakeout" in the North American liquefied natural gas (LNG) business could take place as early as this year with many of the proposed LNG import terminals being delayed, put indefinitely on hold or simply trashed altogether, according to energy consultant Stephen Thumb of Energy Ventures Analysis (EVA) in Arlington, VA. Thumb said companies are moving so quickly that the vast majority of the supply, infrastructure and markets will be off the table soon.

"I think there are a total of 98 potential projects [in North America] and 10 of those are expansions," Thumb said in an interview. "We list the 10 expansions as separate projects because we're trying to keep track of the timing of the capacity. Of those 98, we have 20 in the so called 'likely' category. It just sure looks like they are going to proceed because: a) they have permits, b) they have locked in some form of supply, or c) they are already under construction -- and even if they have supply problems, it's tough to argue once they are under construction."

Anadarko's proposed Bear Head LNG facility on Cape Breton Island in Nova Scotia falls into that latter category. However, Anadarko announced last week that it is stopping construction on the project until it can line up LNG supply, which it hopes to do over the next few quarters. Thumb said the company initially planned to sign a supply deal with Algeria but has since turned to a Russian firm that looks promising. Competitors rushed in and basically beat Anadarko to the negotiating table in Algeria, said Thumb.

That has been the story with many other LNG project developers. "We think that 2006 and 2007 are going to be shakeout years for all 98 of these projects because first movers have just jumped in and grabbed not only supply, but customers, infrastructure and position in the markets so they have lead times. We just think there's going to be an enormous shakeout. You are going to start [hearing] about this one falling off and that one falling off, as opposed to proposal after proposal after proposal.

"I think the recent five announcements of expansions -- Sempra's Cameron project, the Cheniere ones, etc. -- are sending signals to the rest of the market that 'hey guys, we've already got our site and we're under construction, and not only that but we're going to expand it. So if you are coming in you are not coming in against a dog; you are going against a gorilla.'"

Thumb said companies probably won't just keep these projects on their books for extended periods. As was the case with gas-fired power generation projects, companies are going to have to drop many LNG plans. And the projects that do end up surviving will be faced with low load factors because there probably will be an overcapacity situation.

Regasification capacity is cheap compared to the whole supply chain. It's roughly 15% of the total cost. "It's only about 30 cents/MMBtu in rough round terms, and they are going to overbuild it," said Thumb. "That's not necessarily a bad thing for the U.S. gas market. It gives [buyers] a lot more flexibility." He also said it's not necessarily terrible for investors either. "They can cry all the way to the bank. They are going to make money on this. They have some great arbitraging opportunities."

Some companies, however, may suffer because of their business models, he noted. Cove Point is likely to prosper, he said. BG Group is sitting pretty "because they are making so much money on the liquefaction side and the shipping and the arbitrage. Shell is in the same boat. BP is too. Cheniere is a little different story. They are 100% regas and want to be the biggest guy on the block with 10 Bcf/d. That's bigger than both the Arctic pipelines. It remains to be seen whether they can pull that off. But you have to give them credit. So far, they've done a great job. Their next two projects look more speculative."

Terminal congestion may play a role in which LNG facilities succeed. For example, there are three LNG projects planned for the Calcasieu Channel in Louisiana, three planned near the mouth of the Sabine River and three more planned near Corpus Christi. "That's a lot of ships to coordinate and a lot of required pipeline takeway capacity. The first movers again will jump in. Those could be areas where there's a shakeout," said Thumb. "That's not to say it couldn't be done."

EVA believes another 13 proposed LNG projects out of the remaining 78 planned fall into the "possible" category. "They have imponderables, such as BP's Crown Landing project, which will go to the Supreme Court. If they win, BP will jump in as quick as a cat on that basis differential. If they lose, it's over. That's a tough call to say how it will go."

Another tough one will be Suez's plans offshore Florida, he said. "All the Bahamas projects are dead now, but can Suez pull this one off offshore Florida? It's a great concept, and the basis is there, and Suez is one powerful company in the world LNG domain. They could do it, but they don't have it all technically lined up yet. And Elba is trying fast as it can to steal some of that market share from them."

EVA said among its list of likely LNG projects are the following:

Several on the East Coast are on EVA's "possible" list, including Crown Landing, (NJ), Suez's offshore Florida project and one of two projects proposed offshore Boston, i.e., either Excelerate's Northeast Gateway or Suez's Neptune project. However, Thumb said Canaport and Bear Head may well "squeeze out" the Boston projects if LNG gets moving in Canada first.

"You can't take that much gas flowing in, particularly with no storage up there," he said. "We're seeing one offshore Boston at best, and I'm not sure I would take that gamble unless you think Bear Head is going to die..., then I would take that gamble."

Others on the "possible" list include Cheniere's Corpus Christi project, Gulf Coast LNG Partners' Calhoun LNG project in Port Lavaca, TX, Freeport McMoRan's Main Pass Energy Hub, Galveston LNG's Kitimat project in British Columbia and Sempra's Port Arthur project. For more from EVA, go to http://www.evainc.com/.

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