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Weaver's Cove Champion Undeterred by Overbuild, Undersupply

The veteran liquefied natural gas (LNG) executive behind the embattled Weaver's Cove terminal project in Fall River, MA, told a Houston audience Tuesday that despite community opposition the project will begin construction in nine to 12 months. Additionally, Hess LNG CEO Gordon Shearer said the modestly sized (400 MMcf/d) terminal will secure LNG supplies where others have failed.

It's an entirely different world for LNG developers than it was four years ago when gas demand and prices were on the rise, LNG costs were declining; many fretted that the United States couldn't build enough regasification capacity, and LNG tankers were being ordered on spec, Shearer told attendees at Oil & Gas IQ's Commercial Strategies for LNG Supply 2006 conference in Houston Tuesday.

While terminal developers were gearing up their enthusiastic response to the 2003 National Petroleum Council study that called for more LNG imports and fast, the gas industry was destroying demand with high prices, remembered Shearer. "No sane chemical producer that uses natural gas as a feedstock is going to build a natural gas feedstock plant in the U.S. today. Why would you do that? It would be crazy."

Further, Shearer said, power developers have clearly turned away from gas for their next wave of plant construction, embracing coal instead. "Everybody knows now that gas is going to be short and expensive forever," Shearer wryly said. "This is an industry that takes the last 30 days of price history and projects it forward 20 years. When you look at some of the decisions we've made, it's about that basic."

In this case Shearer was referring to the industry's surfeit of LNG receipt terminal capacity. The Gulf Coast, and probably every coast, looks like it might be overbuilt, said Shearer, a veteran of the Distrigas of Massachusetts LNG terminal in Everett, MA, and now head of the company struggling against community opposition to build the Weaver's Cove terminal in Fall River, MA (see Daily GPI, Sept. 11). Developers are pursuing terminals whose capacity they have yet to sell, and holders of terminal capacity can't find LNG to fill it. "And that doesn't appear to be going anywhere," said Shearer.

"The next round of expansions is under way before the first wave of terminal capacity is even sold out. Here's one of the LNG industry's dirty little secrets: It costs virtually nothing to expand the capacity of a terminal."

Shearer ought to know. As an example he cited the Everett terminal. When Shearer began work there in about 1988 its nominal sendout capacity was 250 MMcf/d, he said. It only took about $200 million to bring it to 1 Bcf/d without the need for additional storage. Today's terminal expansions are very large and are being done at very low costs, especially relative to the cost of the overall LNG supply train.

It's not just the United States where receipt terminal developers have gone, or are going, wild. "Import terminals are surging around the world," said Shearer. "If you looked at a map of Europe right now, it would look a little bit like FERC's [widely familiar proposed LNG terminal] map of North America. There are import terminals everywhere. The port of Rotterdam is starting to look like the Calcasieu River channel. I kid you not. If you would like to build an LNG terminal in Rotterdam, the Rotterdam port authority would be delighted to find you two or three hundred acres and a stretch of deep water and off you go. That's also true in Spain. It's true in Britain.

"When we're putting LNG terminals in Rotterdam it's a strange world out there. Everybody wants them, Thailand, Singapore, India. At one time India looked like the U.S. with a terminal every hundred miles; now it's starting to swing back the other way."

None of this is good news for the holders of the increasingly abundant regasification capacity in the Gulf Coast. Shearer said he sees no need for anyone with an LNG cargo to sign up for firm regas capacity on the Gulf Coast. "My job, if I've got an LNG cargo is to play each terminal owner off against the other to see who's actually going to cut the lowest possible deal to get that cargo in," said Shearer. And by the way, that pattern has happened in the past. It's not a new phenomenon or concept."

It should surprise no one remotely familiar with the competition among terminal developers that Shearer sees a silver lining in what he calls the regas capacity overbuild on the Gulf Coast. While his Weaver's Cove project continues to plow ahead against local community opposition, the excess regas capacity down south provides a backstop to the Massachusetts project as it negotiates for LNG supply. While he conceded that the development schedule for Weaver's Cove is anything but certain, Shearer said his future customers could use Gulf Coast capacity until his terminal is ready. "When we're ready we'll swing back to the baseline deal.

"We have a little overbuild situation, and I think we're going to see that manifest itself in a lot of different ways."

Shearer added that Weaver's Cove is only looking for 400 MMcf/d of supply, a "tiny" amount compared to other terminals looking for 2-4 Bcf/d. "We are the de-bottlenecking volume of two Qatari trains... And there are people with spare LNG out there. If you start counting noses and numbers, you will find that there are LNG suppliers on various lists who have not committed all their LNG to long-term contracts," Shearer said. Further, LNG suppliers have shown that, when they have the flexibility to do so, they will readily divert cargoes to get the best price.

"If you're sitting ready to go in a high-value market, I don't think finding LNG supply is going to be a problem."

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