LNG Activity Is Up, But Shipping is Tight

News from major liquefied natural gas (LNG) players Distrigas and Sonat combined with a recent Department of Energy (DOE) report of a major LNG import increase in the first quarter of this year made the headlines last week, but Gordon Shearer, Cabot LNG CEO, told NGI this is about as active as the LNG market is going to get.

"I think your seeing the peak of LNG spot import activity right now," said Shearer. "Next year will be the peak of long-term contracts fulfilling themselves. After that, however, there could be some serious fall-off."

The main reason for Shearer's pessimism is the LNG transportation situation. "There aren't enough ships now, and many are scheduled to be decommissioned by the end of next year," he said. The average cost to build an LNG transportation vessel is $170 million, and many companies shy away from doing so without a guaranteed long-term contract for the ship's usage, he added. Presently 90 LNG vessels exist worldwide, and only four are without long-term contracts.

Reports of a burgeoning LNG import market, such as the recent DOE report, should be taken with a grain of salt, according to Shearer. The DOE said LNG imports were up 56% to 39 Bcf in the first quarter of 1999 compared to the same period in the previous year.

"What people have to realize is that LNG imports were starting from a very small base. Compared to last year, this year's imports will look very dramatic. Next year, I think it will increase as well, but that's only because it started from such a small base. LNG is still only a small sliver of the overall amount of gas used in the US."

Shearer was nonetheless excited about last Wednesday's announcement of a deal between Distrigas, a Cabot subsidiary, and El Paso Energy, which agreed to buy 45 MMcf/d from the Distrigas LNG import terminal in Everett, MA, for New England power generation.

The gas will be used to fire a Berkshire Power Co.-owned 272-MW power plant in Agawam, MA. Berkshire Power is a joint venture owned by El Paso and Boston-based Power Development Corp. The gas will be delivered to the plant by Tennessee Gas Pipeline. Financial terms were not released.

"The Berkshire contract is significant because it is one of the first major commitments of LNG to be dedicated to a merchant power producer in the New England market," said Richard L. Grant, COO of Cabot LNG Corp.

The contract was signed just days after Distrigas received its first cargo from Atlantic LNG Co.'s Trinidad and Tobago processing facility. Cabot is a 10% shareholder in Atlantic and holds a 20-year purchase contract for 220 MMcf/d to be delivered to the Everett facility.

In total, Distrigas can deliver up to 450 MMcf/d through pipelines and another 100 MMcf/d by truck. Imports come chiefly from Trinidad and Tobago and Algeria. Shearer said most of the gas is consumed by New England, with other main markets in New York and New Jersey.

If Sonat has its way, the Elba Island, GA, LNG facility also will receive imports from the Atlantic terminal in the near future. The Alabama-based company filed last week for reinstatement of the mothballed Elba Island marine receiving terminal, which has been dormant since 1982. If approved, the facility would begin operating in mid-2002.

As a result of an open season, Sonat Energy Services, Sonat's marketing affiliate, was awarded a 22-year contract for all of Elba Island's capacity, which amounts to 80 Bcf per year. The facility, which is located near Savannah, GA, has a peak send-out rate of 540 MMcf/d and a baseload send-out rate of 330 MMcf/d.

"Sonat Energy services was one among many bidders. People were bidding on a regulated price, so they could either bid the full price or below it. Sonat Energy Services bid the full price for the longest period, so it got the capacity," said Sonat spokesman Bruce Connery.

Shearer doesn't think the reactivation of Elba Island will impact Distrigas. "They are focusing on power generation in the Southeast, and we very rarely send gas down that way anyway. On the supply side, the fact that we both will get gas from Trinidad will have no effect, because there is just a ton of gas over that way."

Elba Island's reactivation is subject to US and Trinidadian governmental approvals, final agreement executions and the finalization of shipping plans.

John Norris

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