Reiterating its belief that liquefied natural gas (LNG) imports will be necessary to augment dwindling domestic supply, Energy Security Analysis Inc. (ESAI) added that it believes that imported LNG will “radically change” the U.S. and world gas markets, pushing domestic gas prices downward.

“Our price forecast for 2005 is $4.51/MMBtu and our price forecast for 2006 is $3.40/MMBtu,” said ESAI Senior Energy Analyst Scott DePasquale, who will be speaking at GasMart 2004 in Denver on May 18 (see https://www.gasmart.com/program.htm). For 2007, ESAI believes the nominal gas price will fall even lower to average $3.29/MMBtu. The analyst noted that the lower prices will come thanks in part to growing LNG imports at existing terminals.

DePasquale added that because imports will likely keep prices down, LNG may be regarded as “bad news” for U.S. domestic producers in frontier areas needing higher prices to remain commercial.

In a new report titled “LNG on the Margin: The Future of the Global LNG Market and the Impact of Imports on the US Gas Market,” ESAI concludes that North America can no longer meet demand for natural gas at traditional price levels with indigenous resources. Although many of the country’s current gas needs could be satiated by domestic production from restricted lands, DePasquale, the lead author of the ESAI study, said he doesn’t see the current political constraints loosening enough to be a factor in the short- to medium-term range. The United States already has begun started to depend on surging LNG imports for enough supplies to affect domestic gas prices.

Noting that many energy analysts take current price levels and then extend prices in a fixed or linear fashion, DePasquale said that ESAI’s study, in contrast, concludes there will be substantial downward price pressure on natural gas prices from 2004-2008. He added that expanding LNG import capacity will increase the incentive to explore and develop gas reserves outside of the United States. On the margin, it will be cheaper to develop and ship foreign gas to the United States than to develop domestic reserves.

Mulling over all of the new proposed projects, DePasquale predicted that eight new LNG import terminals will be built to serve the United States. In its breakdown, ESAI said it expects the proposed Gulf of Mexico/Gulf Coast terminals in Cameron, LA; Freeport, TX; offshore Louisiana (ChevronTexaco’s Port Pelican); and Altamira, Mexico, to succeed. On the East Coast, he predicts that one terminal in the Northeast (most likely in Maine or the Maritimes Provinces of Canada) will be built along with one project in the Bahamas. For the West Coast, DePasquale predicts that one Baja California and one Southern California offshore project will succeed.

“With these developments, we shall see the internationalization of the U.S. gas business, and to some extent the Americanization of the global LNG business, in the decade ahead,” said DePasquale. “In no way can this be said to simplify matters. Life will never be the same in either the domestic or the foreign gas markets.”

The study projects that in just 10 years, 12% of North America’s gas supplies will be imported, and in certain key Gulf Coast market pooling points — such as the Henry Hub and Houston Ship Channel — 30% of the supplies will be from imports. ESAI predicts that LNG imports will increase from less than 1 Bcf/d in 2002 to more than 9 Bcf/d in 2014.

“LNG is now a major factor in the strategic outlooks of all our U.S. energy clients,” said DePasquale, “and the burgeoning U.S. demand for LNG is a major factor in the outlook for all of our international clients.”

The ESAI also looked at the ramifications that increased U.S. demand will have on the world market. “Until now, U.S. demand for LNG was not a factor in the world,” said Ed Krapels, director of ESAI’s Gas and Power practice. “As the U.S. market share of LNG exceeds 20%, supply security becomes a major issue that federal and state regulators and industry players have to manage.”

On the policy front, ESAI said a system needs to be put into place to manage the obvious energy security concerns raised by LNG. The United States and other governments will have to develop policies and emergency management regimes will be borrowed from the oil experience, including LNG /natural gas stockpiles and sharing procedures. DePasquale said an LNG version of OPEC is “inevitable.”

For more information on ESAI’s new study, contact Allan Salek at (781) 245-2036.

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