Alarm bells should be ringing in the offices of pipeline companies and domestic producers as imported liquefied natural gas (LNG) is expected to grow to about 12% of annual U.S. gas supply in 2010 from only about 1-1.5% today. Such a dramatic increase in supply, coming into the market at brand new locations, will drive down pipeline transportation values and gas prices, according to analysis done by Wakefield, MA-based Energy Security Analysis Inc. (ESAI).
These potential impacts have been largely overlooked, said Scott DePasquale, gas consultant at ESAI, which plans to release a new report in March on the subject, titled “LNG on the Margin.”
The consulting firm expects that out of the 32 proposed LNG import terminals in North America (excluding central Mexico) at least eight will be built by 2010. “This is a conservative outlook,” noted De Pasquale. “Some folks have said to us that it’s ridiculous to think you are going to get another two terminals on the East Coast and four more in the Gulf Coast, but if you look at the project developers and the upstream contracts that have been signed to back those projects it does end up being a conservative outlook. There are more than 30 LNG proposals. We’re saying a total of four here [Gulf Coast], two there [East Coast] and two on the West Coast is pretty conservative.”
ESAI forecasts a total of 3.2 Tcf/year of LNG will be entering the United States in 2014, which should be about 12% of total demand based on a demand forecast of about 26.5 Tcf/year.
“What happens when you bring in LNG from someplace like Algeria where the cost is $2.50-$2.75/MMBtu? It starts displacing production to the extent that the physical infrastructure can take it. It also depends on where the terminal is connected to the pipeline and what the takeaway capacity is,” De Pasquale noted, adding that there will be significant downward pressure on prices and basis in key locations across the United States.
“We think there will be significant downside pressure on SoCal border prices,” he said. “We think there will be quite a bit of downside price pressure in the Northeast, and we think price levels in the Gulf will be more volatile and will be forced lower than they would have been otherwise. It means lower prices and tighter basis differentials.”
The Northeast on average uses about 9-10 Bcf/d of gas. ESAI predicts there will be about 3 Bcf/d of additional LNG import capacity in the Northeast by 2010 with about 2.5 Bcf/d of total new LNG supply flowing on average throughout the year. “We are expecting a strong utilization rate,” De Pasquale said. What that means is that some Gulf Coast supply could be displaced and basis differentials will tighten.
ESAI predicts that in addition to the LNG terminals at Everett, MA, Cove Point, MD, and Elba Island, GA, there will be at least two new terminals on the East Coast, including one in Providence, RI, and one in the Bahamas.
“KeySpan’s Providence terminal is likely to get sited because it’s already an LNG storage facility,” said DePasquale. “You’re looking at a minimum of four terminals operating.
“The Fall River terminal [in Massachusetts sponsored by Weavers Cove Energy], which is backed by Poten Partners probably won’t happen,” he predicted. “They filed for a permit with FERC, but we haven’t modeled it in because there are a few thousand houses within a few miles of the terminal and we see it as a struggle to have it sited. That doesn’t mean it won’t happen; it means it’s an uphill battle, whereas the Brayton Point facility in Somerset, MA, probably has fewer siting issues, but then again it is backed by a much smaller company.” He also noted that TransCanada’s Fairwinds project in Harpswell, ME, is facing some local opposition.
Even with the difficulties of getting plants sited, if you add up all the additional LNG, it’s pretty significant, said De Pasquale. “It is a substantial downward push on prices and we can definitely expect a lot of downside pressure on basis as a result. What that means for pipelines is less market leverage and probably lower cash flows.”
He said that the Providence LNG terminal probably will back up gas on Algonquin, driving Algonquin City Gate prices slightly lower and reducing the need for transportation capacity on Algonquin and other upstream pipelines. If Weavers Cove or Fairwinds is built, there would be less need for capacity on Tennessee Gas and the other long-haul pipes to the Northeast.
De Pasquale also noted that Elba Island LNG has been somewhat stranded because of capacity limitations on South Carolina Pipeline. Southern Natural and Transcontinental Gas Pipeline certainly aren’t going to jump at the opportunity to lower their transportation values from Gulf Coast producing fields to accommodate additional supply from Elba Island, said De Pasquale.
But the pipelines eventually will be pressured by their large endusers. “A lot of transportation contracts are coming due and the utility commissions have been pushing for shorter duration contracts. There may be a fit in some circumstances, and utilities don’t have to have 100% of their portfolio backed by transportation contracts, although a lot of them do. That’s an important [problem]. For the contracts that are up for renegotiation — many of them were signed 15- and 20-year deals back in the early 1990s — the pipeline companies are going to lose a lot of leverage obviously and the long-term capacity values are going to be coming down.”
He said the utilities are still going to need long-haul capacity, but they probably will have slightly less of a need and will end up paying lower prices as a result.
“The other thing you might see is less of a spread between summer basis, and winter basis in the Northeast and tightening quite a bit. You could go from averaging about 35-45 cents in the summer at Tennessee Zone 6 and Algonquin Citygate and about 85-90 cents in the winter with peak days $2 above the [Henry] Hub, to having the LNG terminals keeping the winter capped out with lower spikes and average winter basis maybe closer to 60-65 cents and in the summer probably less of an impact but still tighter basis.”
The Gulf Coast is expected to see even greater amounts of LNG supply than the Northeast and probably will feel additional downward pressure on prices, particularly at certain key locations where LNG deliveries will flood the market most. “We are looking at four more terminals there. The biggest concentration of LNG investment will probably be in the Gulf because that is where the most takeaway capacity is and you have the most options as a terminal operator there.”
He said ESAI predicts that by 2010 an additional 3.7 Bcf/d of LNG supply will be entering the market through five Gulf terminals: 1.5 Bcf/d through the Trunkline LNG terminal in Lake Charles, LA; 500 MMcf/d from an offshore terminal (El Paso’s, ExxonMobil’s, Shells, McMoRan’s or ChevronTexaco’s); 1 Bcf/d through the Freeport LNG project; 500 MMcf/d through Sempra’s Cameron, LA, project; and 700 MMcf/d at Shell’s Altamira, Mexico, project.
“We think that for key hubs, especially in the Gulf states like the Houston Ship Channel and the Henry Hub, about 30% of the physical gas moving through the pools will be LNG, so there are obviously displacement issues.
“The other dynamic is if the spot LNG market develops as people think that it will, because we will have more tankers available that aren’t tied to specific projects, when it does become economic to divert cargoes from Europe, then you will see big downside price swings in areas where LNG has a lot of market penetration, like the Houston Ship Channel because of Freeport.”
What’s going to happen to prices? De Pasquale predicts that one day prices could be trading at $3.50/Dth or higher and then instantly fall to $2.90 when a tanker unloads 2 Bcf of gas.
“It’s unclear how spot cargoes will change the dynamics of cash trading and the way the market will work,” he said. “I think it will be more difficult to hedge, but the good news is that with baseload LNG contracts there will be a constant downside pressure that will keep prices converging toward a $3 floor. At the same time the volatility in the cash market most definitely will increase.”
In the West, DePasquale said he expects one of the five proposed LNG terminals in Baja California Norte, Mexico to be built and probably one in Northern California. Those two terminals probably will back gas into the Permian Basin on El Paso and then into the San Juan Basin. Rockies gas would still flow because it is priced competitively, he said.
“I think there are concerns because of all this LNG. I think there are cash flow concerns for pipelines because clearly anytime you reduce demand on one side of a pipeline the ability to charge a certain capacity price decreases. They will be forced — if there are reliable LNG alternatives — to reduce their long-haul capacity payments. However there will be small opportunities to relieve congestion that is created by LNG because you will be pushing a lot of extra gas in.
“And I don’t know how a domestic producer says it’s a good thing for them if 30% of the flows at the Houston Ship Channel are LNG.”
For more information on ESAI go to https://www.esai.com/index.html.
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