Major Growth Expected in U.S. LNG Market
Once upon a time, some regions of the United States were having problems meeting peak seasonal demand for natural gas. Inadequate pipeline and storage capacity, combined with production exceeding new natural gas discoveries, sent suppliers looking for alternatives. Imported liquefied natural gas became a hot commodity. Now the story has been rewound and is playing all over again --- with bigger players and a wider stage.
The LNG market, which has had an up-and-down history in the United States, first gained its niche audience in the early 1960s, but because of the high cost of liquefaction, transportation in specialized ships from remote locations, and re-gasification, it has never played well in low-priced U.S. markets. All that has changed with the current demand and high natural gas prices that are expected to linger for some years. The two operating U.S. import terminals are seeing record business, and prominent energy companies have announced plans in recent days to expand the market like never before.
Witness these recent news stories:
Jan. 24: The largest operating terminal, CMS Trunkline LNG in Lake Charles, LA, said it more than doubled its cargoes last year, up to 55 from 27 in 1999. It conducted an open season in December to offer long-term LNG terminal service and determine customer needs for a deliverability expansion. The facility now has an existing capacity to provide about 90 ship cargoes per year at 2.8 Bcf per ship.
Jan. 28: Enron Corp. said it is looking into the possibility of developing a new import terminal for LNG in the Bahamas, connected by a 90-mile pipeline to Florida. The cost of the proposed project, $300 million to $400 million, could be up and running by the end of 2004, and be the first such facility built to feed the U.S. gas market since 1978.
Jan. 30: Williams Cos. filed an application with the Federal Energy Regulatory Commission to reactivate LNG import services at its Cove Point terminal in Lusby, MD. The reactivation includes modifying existing facilities and constructing new ones at a cost of about $103 million. The total LNG storage capacity would increase to 7.8 Bcf from 5 Bcf, with reactivation scheduled for April 1, 2002. The facility has been in use for storing liquefied pipeline gas, but has not received imports.
Feb. 5: El Paso Energy Corp. announced it would spend at least $1.6 billion over the next five years to build six LNG terminals, three in the United States, two in Mexico and another in the Bahamas. Five of the projects, costing $250 million to $350 million each, would serve the U.S. market and could be up and running six months before Enron's proposed Bahamas facility. The company's Sonat LNG subsidiary already is in the process of reactivating its 4 Bcf capacity import terminal in Elba Island, GA. The plant, which could be operational this October, will be able to deliver 540 MMcf/d of gas into the U.S. pipeline grid.
Feb. 6: BP Exploration (Alaska) Inc. pushed a proposal before the Alaska Senate Natural Resources Committee to liquefy gas there and ship it by tanker to Asia or transport it to the Lower 48. Another proposal by Anchorage-based Yukon Pacific Corp. would liquefy gas at the port of Valdez then load it to tankers for shipment to markets.
What's going on? Jeff Beale, a principal partner with CH-IV Cryogenics LP in Millersville, MD, spends most of his time overseeing the activities of his company's LNG engineering activities. An internationally known expert on LNG operations, he has worked at both the Cove Point LNG terminal when it was running, and in 1979, he set up the engineering team for the CMS Lake Charles terminal and directed its startup. With 20 years in the business, Beale said that he's never seen as much activity in the LNG market as he's seen in the past year.
"LNG is no longer a short-term stopgap," said Beale. "It's become just like a natural gas pipeline, and I think we're going to see a major growth in the LNG market, especially with what's going on in California and other parts of the country."
As an outside consultant for Williams as it attempts to reactivate the Cove Point facility, Beale said LNG is "completely changing to a commodity-driven market," something he never expected when he first came into the business two decades ago.
"Just track the gas prices," said Beale. "That's the real driver." He said that back in the 1970s, when the LNG market was in full swing, many countries set up a strong LNG trade, with Algeria leading the way. The U.S. market remained small, and was concentrated on the East Coast. Now, however, it's very different.
"What we're seeing today is LNG being treated as a spot shipment. It's far more just a commodity like natural gas. You have so many suppliers out there and their 'pipeline' is the tanker on the ocean. It's the same thing. If you step back from LNG and look at it, it looks a lot like a gas pipeline; even more so today."
More greenfield facilities are rumored, he said, in addition to the latest announcements from El Paso and Enron, with the biggest surprise expected for terminal construction along the West Coast.
"The 'realty' has always been concentrated along the Atlantic Basin," said Beale. "You can look at all of the Pacific trade, but nothing on the U.S. side of the Pacific until the interest now." He said building a liquefaction plant in Alaska "seems to be the logical approach" to supply the critical California market. The most difficult thing along the West Coast, he said, will be in finding pipeline interconnects.
For 10 years, the Western Terminal Association tried to site an LNG facility along the West Coast, but Beale said that after three years of work, it finally gave up. One proposed West Coast facility lost out because it was too close to the San Andreas Fault. Though he never thought there would be a Pacific-side LNG terminal, he expects to see one soon. "There is a lot more competition there in the marketplace." El Paso reportedly is looking at a possible site in Baja California.
The last time the Energy Information Administration took an in-depth look at the LNG marketplace was 1997, said Margaret Natof, who is in charge of LNG storage information for the Department of Energy office. Though she knows of no studies planned in the near future on the market, she said there is more interest.
"I get a lot of phone calls and there's a lot of interest and a lot of questions," said Natof. "But it's still only a small part of what we're tracking, and we just don't have a lot of data."
Only two LNG terminals in the United States are currently operating - CMS Trunkline and the Cabot LNG terminal at Everett in Massachusetts, which was bought by Tractebel last year. The Everett facility received 44 cargoes at its terminal in 1999, up from 18 in 1998, and it expected a 10% to 20% increase in import volumes by the end of 2000 (see NGI, July 17, 2000).
The two mothballed facilities are Cove Point and the Elba Island LNG import terminal in Georgia. Neither has ever received imports. They were built, shut down and written off in the eighties because gas prices had dropped to uneconomic levels by the time they were completed. Last year, Sonat, an El Paso Energy subsidiary, successfully petitioned FERC to reactivate Elba Island. Williams did the same with Cove Point, which has seen limited use for storing liquefied pipeline gas for peak-shaving.
Natof said most of the interest today remains with the "little" facilities that are used on site for businesses, which liquefy pipeline gas and store it during the off-peak and re-gasify it for peak use, but she expects that to change with the high cost of natural gas. LNG accounted for about 1% of the U.S. total gas consumption, about 60 Bcf/d, in 1999, but some predict it could grow to between 5% and 8% if the four existing plants are expanded.
"What used to be backward is now forward," said Beale. Where some energy companies once considered LNG a "four-letter word," Beale said the attitude has totally flip-flopped. "LNG is just another supply today, and it's only going to grow."
Carolyn Davis, Houston
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