The industry is seeing a slowdown in the development of liquefied natural gas (LNG) terminal projects in the energy-friendly Gulf Coast region due to concerns over the price environment for imports, said Hess LNG CEO Gordon Shearer Tuesday.

The basis differential for imports in the Gulf region has become negative relative to the Henry Hub over the past couple of years, Shearer said during a Platts Energy Podium press briefing in Washington, DC.

A case in point is the Freeport LNG terminal on Quintana Island in Brazoria County, TX, south of Houston. “What we have seen in the last two years is the basis differential of the Houston Ship Channel [has] moved dramatically negative to Henry Hub. I think it’s gone from minus 10 cents to minus 50 cents [from Henry Hub],” he noted. As a result, ConocoPhillips, a major player in the Freeport facility, “has shifted their supply from Qatar [to] Freeport over to Golden Pass,” an LNG terminal proposed by ExxonMobil for southeast Texas, Shearer said.

“A 20-cent, 30-cent price differential in an $8 market doesn’t seem [like] very much, but oddly it’s enough to move people around,” he said. “We’re seeing [a] fallout of this with canceled projects” in the Gulf Coast region.

Globally, LNG is seeing the “most rapid growth ever” due to increased demand and high oil prices. China and India are “very rapidly growing markets,” and Japan alone accounts for an estimated 30-40% of the world’s LNG demand, Shearer noted. With its recovering economy, “Japan is on the hunt” for LNG.

The U.S. is facing very tough competition from these countries and Europe. “We’re learning that foreign utilities, particularly in the Far East, can outbid any U.S. price you can imagine. The reason is that their markets are not marginally set by the same pricing rules [as is ours],” Shearer said. “There’s no limit to what can be bid on the margin for that last cargo.”

He noted that so far this year the level of LNG imports into the United States has been higher than previous years due to the “relatively milder” weather in Europe, Korea and Japan, as well as new liquefaction capacity and plenty of new shipping this year. “Those kinds of dynamics shift everything around,” Shearer said.

The United States is kind of becoming the “swing market” for the global LNG market. “It’s a wonderful place to swing volumes in and out, particularly in the summertime. It’s a good place to balance other markets, like Europe and the Far East,” he told reporters. “We’re becoming the shock absorber for Asia.”

The U.S. “is going to be a summer-dominated LNG importer” due to the fact that both Korea and Japan have no facilities to store natural gas, he noted. Shearer said he sees “supply definitely making its way [into the U.S.] in the summertime,” as well as in the winter.

There will be “sort of a surge and slump scenario” in the United States’ market over the next five years, according to Shearer. “When we get very high prices, we’re going to attract supply,” he said.

As for the status of Hess LNG’s controversial terminal project in Fall River, MA, Shearer said “we are…moving along steadily,” but it’s “not as quickly as we would like” due to the “hostile environment” in New England (see Daily GPI, July 1, 2005). He noted that the Weaver’s Cove LNG project is not the only energy project coming under attack in the region.

“Wind farms have attracted at least as much opposition as LNG terminals. If we can’t site wind farms in the evergreen, liberal Northeast, then I don’t know what we’re going to do for energy supply. Maybe we will revert to wood chip burning,” or possibly whale oil will make a comeback for lighting, he said.

Shearer noted the company has had to acquire between 43 and 52 permits for the Massachusetts terminal project, while it had to obtain only four permits for a project in Ireland. “We need to find a way to unblock [the] logjam.”

The company is “actually relatively optimistic that we will get through [the permitting process],” he said, adding that the “prize is worth it.” Shearer noted that Weaver’s Cove should complete permitting within about nine months, with construction of the facility to take three years.

He said Weaver’s Cove expects to get a favorable letter from the U.S. Coast Guard soon. The company is proposing to use 55,000-cubic-meter tankers, which are about one-half to one-third the size of traditional tankers, to bring the LNG through the narrow waterways in Massachusetts to the 75-acre terminal site in Fall River. Shearer said larger tankers would haul the LNG from foreign suppliers to probably somewhere in eastern Canada, where the smaller tankers would then pick it up.

As for other East Coast projects, he sees the 1 Bcf/d Canaport terminal in St. John, NB, being built (see Daily GPI, May 18, 2006). “I struggle to see many more,” Shearer said. No new Gulf Coast terminals will be built beyond those already in construction, he said. On the West Coast, he only sees Sempra Energy’s and Shell Energy’s Costa Azul LNG project in northern Mexico being built (Daily GPI, May 16, 2006). “I think that’s it for the West Coast for the next 10 years.”

The proposed Crown Landing terminal in New Jersey faces a “small problem” in the wake of a Supreme Court special master’s decision last week that Delaware has the authority to block the project, according to Shearer (see Daily GPI, April 17). The Sparrows Point LNG project near Baltimore, MD, “could happen,” but “that’s a tough one,” he said (see Daily GPI, Feb. 5). And he called the Broadwater Energy project proposed for Long Island Sound, NY, a “lightning rod,” and said it has “fundamental questions of economics” (see Daily GPI, Jan. 31).

Shearer also believes the Quoddy Bay LNG terminal proposed for Maine could be held up significantly by the dispute between the U.S. and Canadian governments over whether U.S.-bound LNG tankers can use Canadian waters to reach their terminals (see Daily GPI, April 9). “I think the U.S. will win, but how long will it take…It’s not going to bring a speedy resolution to the LNG project.”

As for international rumblings about the prospect of a natural gas cartel, Shearer said, “I think it’s a real concern…much less for the U.S. than for Western Europe and the Far East.” It definitely is “something that’s got Europeans very nervous.”

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