Consultants at Energy Security Analysis Inc. said they expect the U.S. gas market to become the “sink” for any unwanted or spillover global LNG supply in the future, which means significant downward gas price pressure and a struggle for domestic gas producers. However, not all market experts agree on that assessment. Benjamin Schlesinger, president of Schlesinger and Associates Inc. in Bethesda, MD, said that such fears are unfounded.

In a report issued earlier this week, ESAI predicted that as much as 30% of the gas supply at certain pooling points, such as the Houston Ship Channel and the Henry Hub, in 2010 could be coming from LNG, which means domestic producers supplying those same points will feel downward price pressure from LNG. “When you start looking at the impact in specific places like that, it’s much bigger than you might otherwise think it would be,” said Scott DePasquale, natural gas analyst at ESAI (see Daily GPI, Nov. 11).

DePasquale said the Cameron, LA, LNG import terminal will be delivering about 350 MMcf/d in 2010 and 122 MMcf/d of that will go directly to the Henry Hub. The same sort of impact will be felt at the Houston Ship Channel, and as well on Trunkline because of the expansion at the Lake Charles facility.

In total, ESAI expects there will be five operating LNG terminals in the Gulf Coast region in 2010, including the following projects: the existing Lake Charles LNG terminal; the FERC approved Cameron terminal; the Freeport, TX, terminal proposed by Cheniere Energy; the Mexican approved Altamira project proposed by Shell; and an offshore Louisiana project — Shell, ExxonMobil, El Paso and ChevronTexaco have all announced plans to build one. ESAI said minimum LNG supply in the Gulf Coast region in 2010 should be about 2.5 Bcf/d. Total U.S. LNG supply in 2010 should be about 6.4 Bcf/d from 12 terminals, including five along the Gulf Coast, five along the East Coast and two on the West Coast.

As LNG becomes an integral part of domestic gas supply, imports will have a dramatic effect on market dynamics, supply volumes, and price volatility, according to a new study by ESAI titled “LNG on the Margin: Modeling the Impact of LNG Imports on US Regional Gas Prices.”

“The ultimate deliverability and interruptibility associated with LNG imports will also give way to significant changes in natural gas cash and futures markets,” said DePasquale. The level of influence will depend on “how many forthcoming LNG contracts are short-term or ‘spot…'” He said that as LNG imports slowly become more of a baseload and daily supply alternative, the variability of shipments will significantly alter the daily flows of gas in the heart of U.S. distribution hubs — a phenomenon that will bring increased price volatility in cash and cash-related financial product markets.

“And this increase in short-term volatility will be difficult to predict due to the opaque nature of ‘spot’ cargo trading,” ESAI said.

Over time, ESAI said, domestic E&P companies will be threatened by the relatively cheaper LNG. With an LNG landed cost near $2.75/MMBtu, and factoring in ESAI’s forecast for a long-term domestic price floor of $3.00/MMBtu, imports would also put strong downside pressure on production basin gas prices.

“While domestic LNG infrastructure is developed, Gulf producers will have even less incentive to aggressively develop the North American resource base,” said DePasquale.

Schlesinger said, however, the domestic production will remain “the bedrock for…supply in North America” in the years ahead. He dismissed any suggestion that demand for producers’ gas may be displaced by the expected massive growth in LNG over the years.

“The demand is that strong” for both LNG and domestic production to co-exist in the U.S. energy market, Schlesinger told NGI. He is banking on that demand strengthening “more in the future” — in the latter part of this decade and next — as more new and expanded LNG import terminals come online across the nation and in Mexico.

Schlesinger sees LNG prices influencing prices for domestic gas only “in some cases.” The siting of LNG terminals in “outlying areas,” such as Boston, may put “downward pressure” on the basis differential in the region, he said. But LNG “won’t have much impact [on prices] in the Gulf,” he said. Domestic production is about 15 Tcf/year in the region, and a “few LNG terminals [aren’t] going to make that much difference.”

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