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High U.S. Prices Prompt Increased LNG Trade

High U.S. Prices Prompt Increased LNG Trade

The price is right for LNG in the U.S. currently, and term import deals should be locked in before these opportunities vanish, according to Tamela Pallas, president and COO of CMS Energy's Marketing Services and Trading division.

"Price is key for increased imports of LNG," said Pallas, speaking to international delegates meeting at the GasTech 2000 conference in Houston Thursday. She noted that prices in the future likely will not be as high as they are today. The current 10-year strip is above $3.

At current pricing levels, long-term LNG deals easily could be made in the United States, she said. "Timing is essential in capturing these premium prices and long-term LNG negotiations need to be accelerated. Potential LNG projects that were uneconomic at a $2 gas price are now viable at current price levels. Attractive long-term pricing can be locked in well in advance of actual delivery."

For LNG producers, there are opportunities "provided they are willing to structure contracts to meet the dynamics of the market," she said. "Trading of both natural gas and power futures has increased, and with this growth we have seen increased price volatility. The futures market offers the buyer and seller a multitude of ways to hedge prices' risk and capture value."

Because of these factors liquefied natural gas is due for a major comeback in the United States. Around the world, it's been a solid standard, and more popular today than 20 years ago. LNG lost its luster in U.S. markets about 20 years ago, and storage facilities were never finished, and some were decommissioned. Today, with U.S. demand growing, marketers are taking a new look, and finding they like what they see.

Consider these recent news stories: Southern Natural Gas, acquired recently by El Paso Energy, is spending $26 million to reactivate its LNG terminal on Elba Island near Savannah, GA for shipments beginning in 2002 (see NGI, March 20). After spending $400 million to buy it, Williams plans to spend $150 million more to recommission the Cove Point LNG facility it purchased from Columbia Energy in May (see NGI, May 8).

In a deal that closed in September, Belgium's Tractebel purchased Cabot LNG, the largest U.S. liquefied natural gas importer and distributor in the Northeast, and its LNG terminal in Everett, MA for $680 million (see NGI, July 17). Also in September, AES Corp. said it had begun construction on a $340 million electric power plant and LNG importing facility in the Dominican Republic (see Daily GPI, Oct. 2).

And then there's CMS Energy's Trunkline LNG terminal, located near Lake Charles, LA, the largest active terminal in the United States for importing LNG from around the world. CMS acquired the facility as part of its purchase of Panhandle Eastern Pipe Line Co. and Trunkline Gas Co. from Duke Energy in 1998 (see NGI, Nov. 9, 1998).

But the stories won't end there, as more companies move into LNG importing or storage in the energy hungry United States. LNG imports were up sharply in 1999, nearly double from the year before.

Salomon Smith Barney reported in its Natural Gas Price Outlook on Oct. 12 that LNG imports from the two currently operating terminals in Massachusetts and Louisiana are expected to increase to 0.65 Bcf/d this year and 0.78 Bcf/d in 2001, up from 0.44 Bcf/d in 1999. When all four U.S. plants are operational by 2002, Salomon Smith Barney estimates that the combined capacity will be 2.7 Bcf/d.

LNG has "been one of the world's most rapidly growing fuels, growing by approximately 8% a year since 1980," said Pallas.

Japan and European countries are the most visible importers of LNG. But with natural gas prices up and demand skyrocketing, LNG has become a lot more attractive to U.S. interests. Pallas said the worldwide spot LNG trade has grown to 166 Bcf in 1999, up from 38.8 Bcf in 1992 --- and the United States receives 35% of the deliveries.

"In 1999, the U.S. market was the second leading spot LNG importer in the world, trailing Spain by a very small margin." Pallas said that the CMS Lake Charles terminal accounted for 60% of the spot deliveries in the U.S. in 1999, too. From its Lake Charles terminal, CMS has access to 15 major natural gas pipelines.

In July, CMS said it had committed cargoes totaling approximately 110 Bcf of LNG that would be delivered this year to its Lake Charles terminal (see Daily GPI, July 19). The amount of cargoes is more than in any year of the terminal's 17-year history. In 1999, the terminal had 27 cargoes, up from 17 in 1998.

As to where the imports will come from, Pallas pointed to Abu Dhabi, Qatar and Oman as being "ideally located" to ship LNG to the Far East, Europe or the United States. "Spot LNG trade has been enhanced by the growth in Middle East LNG producers," she said.

Just a few years ago, "significant short-term trade in the United States" could not have been envisioned, and no one would have thought that new import projects would center on the U.S. market. But she said that as deregulation takes hold and supplemental supplies become more abundant, it's a natural step.

Still, there are hurdles. "The greatest issue facing future spot LNG trade is shipping capacity," she said. "Most spot LNG cargoes have been transported with spare LNG tanker capacity. Spare shipping capacity is shrinking, and as we enter 2001, only a handful of spare ships will be available for spot service." Pallas said that as LNG trading increases, the benefits generated by increased efficiency would give way to change.

"The U.S. market may not always be the highest netback market for LNG producers, but world gas and power markets are changing and U.S. gas prices are converging with those of world markets," said Pallas. "This optimism for LNG into the U.S. market is justified, but needs to be tempered with reality. No energy commodity, gas included, will escalate upward on a straight line forever. The challenge is to structure LNG deals that can flourish in this type of market environment. This will involve flexible trading routes, shipping efficiently employed and flexible terminal arrangements."

Carolyn Davis, Houston

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