Liquefied natural gas (LNG) may not only fill the gas supply gap, but might end up displacing indigenous resources down the road…if enough projects can overcome local opposition and line of the required financing for construction, according to several analysts speaking at the GasMart conference in Denver on Tuesday.
“LNG will penetrate the heart of the U.S. gas market,” said Scott DePasquale, senior analyst for Energy Security Analysis Inc. (ESAI). It already significantly impacts Henry Hub prices, he said, adding that basis is also affected in LNG terminal areas, which could mean “new gas pricing dynamics” might take hold.
“Increasing costs of developing indigenous reserves diverts E&P investment to elephant gas fields overseas,” DePasquale said. “Foreign gas — even liquefied — is simply cheaper to produce and transport than frontier domestic gas.” He noted that there are “good reasons” that gas won’t fall below $4/Dth, which should keep LNG importation economical.
“The development of large scale LNG import/export facilities is the gas equivalent of the development of the super-tanker in the oil business. It makes natural gas imports competitive.”
However, while many agree that LNG can be received in North America inexpensively, the investment needed to construct LNG infrastructure is another story entirely. William E. Hauhe, manager of Global LNG for ChevronTexaco, noted the investment in a terminal is “huge” and “you have to make sure that you can make money doing it.”
The LNG business is a whole lot more than just the liquefaction and shipping functions. There is an entire value chain that also includes offshore gathering and processing infrastructure, liquids extraction and delivery infrastructure and pipeline transportation to market.
Hauhe said that by 2010, North American gas demand will outpace domestic production by 8 Bcf/d. By 2020, that deficit will increase to 37 Bcf/d. He added that despite best domestic production efforts, North America is currently struggling to keep up with demand. “It’s a battle that is just tough to win,” he said. “Staying just even on production is a difficult task.”
Hauhe added that North America is currently demanding just under 200 million tons of LNG a year, but by 2020, he expects demand to be closer to 400 million tons per year.
Because of the race to build these LNG terminals, Hauhe said a number of questions come into play: “Who can get to the market first; who can capture that market; who can do it the most efficiently; and who can do it while making money at it?” he said. “It is a large investment, but in terms of overall energy consumption worldwide, it is still a small sliver of the pie.” Hauhe noted that taking in every step of the process from liquefaction to regasification, the LNG price range once delivered will likely fall within $2-3.50.
Several GasMart panelists agreed that many of the 40 proposed LNG terminals won’t make it to the finish line for a number of reasons. Hauhe said that some will continue to run into NIMBY (not in my backyard) and NOPE (not on planet earth) sentiment. Speaker Laird Dyer, director of Structured Transactions for Shell Trading, preferred the term BANANA, (build absolutely nothing anywhere near anybody).
Dyer said he expected five or fewer import facilities will be built, contributing about 10 Bcf/d of import capacity. DePasquale said he expects eight terminals to be built over the next 20 years. He said it will be almost impossible to get a terminal permitted in Massachusetts, Connecticut or Rhode Island on the East Coast and California on the West Coast. He gave projects located in Maine and the Maritimes a much better chance, while he singled out Mexico as a likely location in the West.
Looking ahead, DePasquale said, that between 2004 and 2007 utilization rates of the existing four [LNG] terminals will up significantly. “I think we will end up with 2.5 Bcf/d of imports through existing terminals by 2006. From 2007-2010, we will likely be in a position where we start to become more reliant [on LNG] as new terminals come in.” From 2010 to 2015, the analyst said he sees the “globalization” of the North American gas market.
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