Boston-based consulting firm Energy Security Analysis Inc. (ESAI) has lowered its 10-year forecast of Henry Hub gas prices by 90 cents/MMBtu to $4.09/MMBtu because of the aggressive investments expected to be made in U.S. LNG infrastructure and the significant destruction of domestic industrial gas demand.

Plentiful LNG imports in the coming years should force production area prices to gravitate toward the average LNG import cost, ESAI said in its Natural Gas Quarterly Review. While total production area LNG imports will probably represent about 10-11% of the total gas supply in the region, ESAI predicts 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 significant 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. “For example, the Cameron, LA, import terminal will be flowing about 350 MMcf/d in 2010 and 122 MMcf/d of that…goes to the Henry Hub, which is about 30% of the total volume that will flow through that specific physical pooling point. The same sort of occurrence happens at the Houston Ship Channel, and as well on Trunkline. The Lake Charles facility will be flowing about 900 MMcf/d into the Trunkline field, which is taking a total of 1,400 MMcf/d.”

He said ESAI is forecasting that at a minimum 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 LNG terminal; the Freeport, TX, LNG terminal proposed by Cheniere Energy; the Mexican approved Altamira LNG project proposed by Shell; and an offshore Louisiana LNG 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.

“I wouldn’t think any less than five terminals would get built on the Gulf Coast based on the economics of the production in the United States because…each incremental Btu is getting more expensive to produce,” DePasquale said. “Drilling costs are going to be up 3-6% this winter from last year.” He said the reason costs are so high and rising is that the majors haven’t spent an additional penny on drilling research and development since 1996.

The struggle of domestic producers to maintain production levels in the face of increasing costs and rapidly depleting reserves is no secret. Production costs have been growing for years and the depletion of shallow high-quality gas reserves has helped raise the floor level of prices, ESAI noted.

The long-term need to replace reserves with more expensive and deeper-level resources has increased the cost structure associated with North American gas exploration and production (E&P) and created a fundamental market support level near $3.00/MMBtu — a price level where ESAI assumes producers are covering costs and recouping a minimum level of returns.

“Long-term price floor certainty has made investors in LNG infrastructure more confident that their assets will be profitable over the next 10 to 20 years,” noted DePasquale. “Investor confidence has triggered aggressive capital allocation to import terminal development, feasibility studies, and has renewed interest in long-term contract negotiations with foreign producers.”

In the mid 1990s, producers were pouring money into developing shallow-water high quality gas assets. Now those assets are depleting rapidly and producers have made a choice to put their money in LNG rather than in deep drilling technology development and other resources such as gas hydrates.

“If you are a big company like British Petroleum do you put the money into developing the technology to help the drill bit withstand pressure below 2,000 feet or do you send that money overseas to get cheap gas and take the risk in developing your LNG structures? Most folks are choosing to go the LNG route,” said DePasquale.

ESAI pegs total domestic LNG supply in 2010 at 6.4 Bcf/d, including supply from the five terminals in the Gulf, two on the West Coast and two additional terminals on the East Coast in addition to the three that are currently on the East Coast at Everett, MA, Elba Island, GA and Cover Point, MD. Total U.S. LNG imports in the first quarter of this year were about 834 MMcf/d, according to the Department of Energy. For more from ESAI, go to

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