Indicative of the complexity and breadth of the supply contracts being contemplated for liquefied natural gas (LNG) imports in the United States, a “cartel-like” pricing structure is likely to emerge as definitive deals come together, a New York City-based energy attorney told an energy conference in Santa Fe, NM, last Thursday. He also predicted offshore terminals may be easier to finance and permit in some areas on the East and West Coasts.

While a few years ago industry sources looked at LNG trade as being marketer-based, the new trend carries many implications, not all of which are well understood, according to Howard Margulis, an attorney with Holland & Knight LLP, speaking at a Law Seminars International conference, “Energy in the Southwest.” It raises the question of whether there will be indexes for LNG, he said.

“My theory is that the cartels are going to drive the price — at least for the intermediate term,” Margulis said. “Cartels are really in control in negotiating the highly complex concessions and reserve allocations, particularly in several areas in Russia, the Middle East and Far East. A number of the majors have been thrown out, and contracts that initially were awarded have been disqualified by the Russian government.

“I think the cartel for some considerable time is going to set the prices. Highly structured contracts will tend to dictate what the price will be.”

Exactly what this means for the U.S. gas markets is unknown, according to a second conference speaker, Greg Hopper, a consultant with the Houston-based Lukens Energy Group.

Will the U.S. market set a ceiling for LNG, or will the LNG set a floor for U.S. gas prices? “‘I don’t know’ is the short answer,” said Hopper, who emphasized that electricity demand and the placement of LNG terminals in the West will drive the construction of new pipeline capacity throughout the West in the years to come.

Aside from the pricing driven by contracts, which will be limited to only the most creditworthy U.S. parties, Margulis also noted that the projected timing for various LNG import projects “is not really very reliable,” Margulis said. “These are significantly capital-intensive projects, and construction-intensive, too.”

He said that the financing and regulatory issues may be significantly easier for offshore projects, compared to onshore terminals. “It really depends on what type of terminal you use. What the design is, whether its offshore — in which case there is minimal state involvement, lesser cost and fewer folks you have to satisfy. So it depends on whether and how you build, and what kind of off-take you have. If it is offshore, I think things are a little more certain.”

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