Liquefied natural gas (LNG) is becoming more economic compared with drilling in many U.S. basins, and by 2009, it could compete with wellhead supply, according to a study by Pickering Energy Partners Inc.

"U.S. LNG shipments account for less than 5% of the total worldwide LNG market," said Pickering analyst Stacy Nieuwoudt. "However, we strongly believe that over the next few years, LNG will be a meaningful component of U.S. supply and a more material factor in the worldwide LNG equation."

Pickering is projecting eight U.S. LNG regasification terminals will be operational in the next few years, and 6-8 Bcf/d of LNG "will be trying to find its way to the U.S. market by 2010. In times of weak global demand, i.e., summer, "we expect many cargoes to find port of call in the U.S. -- the most sophisticated storage system in the world (and largest demand)."

The period between 2008 and 2011 will be "sloppy" as the market absorbs the first wave of LNG, said Nieuwoudt. "During this time, we expect U.S. natural gas rig counts to decline as marginal wells will be replaced by LNG. Given that LNG imports will only account for 10-15% of U.S. supply, we continue to believe that the marginal cost of drillbit supply will determine the market price."

LNG economics are competitive with drilling in most U.S. basins, the analyst noted. "Thus we believe LNG imports will offset some U.S. production. By 2010, our gas supply/demand model indicates the U.S. will need to import an additional 3 Bcf/d more than today. With 6-8 Bcf/d of LNG imports knocking on the door, we propose that 3 Bcf/d of U.S. production will be impacted in high-cost basins or weak Canadian imports."

This environment, said Nieuwoudt, "will prove challenging for the drilling business and E&P [exploration and production] companies operating in high-cost areas. The biggest wildcard remains demand." Pickering is modeling U.S. gas demand growth of +0.5% a year, "which could prove conservative."

Pickering is not optimistic about the prospects for the proposed Alaska and the Mackenzie Delta pipelines, "and we believe the U.S. will continue to grow its dependence on foreign natural gas production. Eventually (maybe) these pipelines will be constructed -- but it will almost certainly take longer and cost more than current estimates...Until dirt starts moving, we will keep it off our project lists."

The current U.S. market is limited by global LNG supply -- not terminals or demand, said Nieuwoudt. "Without any long-term supply dedicated to the U.S. market, the U.S. is effectively competing in the world market for every available spot cargo," winning them only as a premium price point. "However, as more liquefaction plants come online, the U.S. will become the market of last resort in an oversupplied natural gas market" because of pipeline and storage infrastructure.

Despite the number of proposed regasification terminals, "our math suggests North America will build four terminals in the U.S., two terminals in Mexico and one terminal in Canada. In other words, we doubt any terminal not currently under construction will see the light of day given the amount of capacity being built," which includes 17 Bcf/d in the United States, 2.5 Bcf/d in Mexico and 1 Bcf/d in Canada.

The four LNG regasification terminals now under construction would double the number of U.S. regas facilities, and their location along the Gulf Coast is "driven by less opposition and easy access to the existing U.S. storage and pipeline grid," said Nieuwoudt. "Given the concentration along the Gulf Coast, we're carefully watching the Henry Hub differential over the next few years as increased LNG volumes could significantly impact the price relative to other basins."

To read the full report, visit www.pickeringenergy.com.

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