Citing the critical role that imported liquefied natural gas (LNG) will play in bridging the gap between domestic natural gas supply and demand over the next two decades, major LNG developers called on FERC Friday to exempt import terminals from the agency’s open-access and open-season regulations to encourage an influx of foreign LNG supplies into the United States. Without a more favorable regulatory regime, they warned overseas suppliers will go to the “place of least resistance” — Japan and western Europe, for example.
FERC “can send a strong message to the international LNG business community that the U.S. will welcome new LNG import terminals and LNG suppliers simply by indicating a willingness to adopt a more flexible scheme” with respect to its regulation of terminals, said John Hritcko Jr., vice president of Shell NA LNG Inc., during the Commission’s daylong “Natural Gas Markets Conference.”
Across-the-board application of open-access regulation for import terminals “could make the United States less attractive than other potential markets in the Atlantic Basin,” cautioned Phil Bainbridge, vice president for Global LNG at BP Energy Co. On a worldwide basis, LNG demand is expected to double by 2010, said Ron P. Billings of Exxon Gas Marketing Co., adding that foreign suppliers will be able to pick and choose their markets. They will go to those that have the “least barriers,” he noted.
The agency’s open-access regulations are appropriate for natural gas pipelines and storage facilities, noted Bainbridge, but LNG terminals are “uniquely different” and, thus, require a different approach. FERC regulation of terminals would spell “uncertainty and potentially uneconomic results” for developers who are looking to invest billions of dollars in facilities, and would “create difficult and inefficient shipping logistics for suppliers,” Billings said.
While all frowned on open-access of LNG terminals, they said they still supported continued FERC oversight of the entire process to ensure fast permitting and compliance with safety and environmental standards. However, the LNG developers don’t want the Commission to consider LNG facilities as gas companies that are subject to regulation under the Natural Gas Act (NGA).
Shell’s Hritcko said he didn’t believe FERC needed to abandon open-access regulation of LNG terminals altogether. As a “starting point,” he suggested the Commission decide the issue on a “case-by-case basis,” and let the project applicants determine whether open-access regulation would fit their “particular circumstance.”
For example, developers who are building facilities that would not have “proprietary capacity” might seek a “full range” of open-access and open-season options to attract suppliers to their LNG facilities, said Stephen L. Huntoon of Dynegy’s Hackberry LNG Terminal LLC in Louisiana. But builders of “new proprietary LNG import terminals” should not be subject to an open-access regime, said BP’s Bainbridge.
FERC Commissioner William Massey said such a policy could lead to a domestic LNG market that was dominated by large developers, while Chairman Pat Wood said he was concerned it would provide incentives for facilities to withhold capacity from the market.
On a separate panel addressing gas supply and demand, Wayne Andrews of Raymond James and Associates (RJA) noted that production from the 40 largest U.S. producers — which account for about 50% of U.S. gas production — fell 5% during the second quarter over a year ago. He estimates yearly gas production will be down about 6%, or about 3 Bcf/d.
As a result, “I think we’re going to see high gas prices again,” possibly “price shocks” as early as this winter, he told Wood and other FERC Commissioners and staff. RJA has projected average gas prices of $4.25/Mcf at the Henry Hub next year, which he said was above the Wall Street consensus of $3.50/Mcf for 2003.
Canada “has made up a huge amount of the shortfall” in U.S. gas supply in past years, but it “might not be there to save the day” this winter, Andrews said. LNG supplies are expected to be up, but he noted they only represent about 1-2% of total supply today. A representative of the Canadian Association of Petroleum Producers (CAPP) acknowledged that Canadian gas production was down this year, but he said he still expected Canada to supply 16-17% of the U.S. gas market this year.
Even assuming the upcoming winter heating season will be 7% warmer than normal, Andrews projects that approximately 2.7-2.8 Tcf of natural gas will be withdrawn from storage during the period, reducing the amount of gas left in storage in late March to 425 Bcf. That would be a “new low level” for gas in storage at the end of a heating season, he said.
Many believe the current amount of gas in storage is “excessive,” said ConocoPhillips President Mike Stice, but he noted that cold temperatures this winter would wipe out that existing cushion.
Given the “hair trigger business environment” facing the energy industry, Fred Fowler of Duke Energy urged the Commission to focus on the “source of the negative headlines.” He called for “prompt resolution” of the disputed electricity contracts and refund issues in California, saying this was “extremely important” to the gas market.
Fowler, who spoke on behalf of the Interstate Natural Gas Association of America (INGAA), was asked what interstate pipelines were doing to relieve the congestion in and out of the Rocky Mountain region. While there have been “tremendous basis spreads” for shippers, he noted that “no one [has been] willing to step up to sign commitments” for new capacity to justify pipeline construction.
One panelist disagreed and noted that Kern River, for one, was building expansion facilities to provide additional supply access out of the Rocky Mountain area. Fowler said he didn’t believe FERC policies were acting as a barrier to pipeline construction in the Rockies. But with the ongoing “destruction” of the energy industry, “we have slowed down the ability of the industry to build the needed infrastructure,” he noted.
Craig Chancellor of Calpine Corp. cautioned the Commission to take a “hard look” at the tariff changes being proposed by gas pipelines to shield themselves against credit-risky shippers. These proposals are a “knee jerk reaction to the trouble in the market,” he said, adding that any changes approved by FERC should be fair to both the pipes and their shippers. Any efforts by gas pipelines to “gold plate” their systems should be “rebuffed” at the agency, Chancellor said.
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