In light of the lingering safety concerns, real or perceived, over LNG and the cancellation of four proposed LNG terminals due to local opposition, Lehman Brothers is forecasting that only three new liquefied natural gas (LNG) import terminals, out of a total of about 40 proposed terminals, will be built in North America by 2010 for a total of seven operating terminals.

Lehman analyst Thomas Driscoll said he’s forecasting that about 10% of U.S. gas supply will come from LNG in 2010 compared to about 2.5% in 2003. He also has his doubts about the timing of proposed expansion capacity at three existing import terminals. Driscoll predicts there will be construction delays that will push back some of the increased imports to late this decade.

However, his skepticism may turn out to be misguided because there currently are 13 pending LNG applications at FERC. Furthermore, the Commission already has approved one new LNG terminal in Louisiana, pipelines to two proposed terminals in the Bahamas and has granted preliminary approval to a terminal on the Texas Gulf Coast. In addition, two offshore Louisiana terminals already have been approved by the Coast Guard, one of which is expected to enter service by the end of this year. Meanwhile three of the four existing LNG terminals have expansion plans that are supposed to add 2.1 Bcf/d of additional LNG sendout capacity over the next four years.

There are concerns about LNG. No one expects all 40 terminals to be built. Just in the last few months four proposed terminals have been rejected by local communities or governments in Harpswell and Cumberland, ME, in Eureka, CA, and in Baja California Norte, Mexico. The question is whether the LNG industry will continue this losing streak or soon begin to chalk up some wins.

“Even though numerous terminals have been proposed, we believe those proposed in populated areas such as the East and West Coasts are unlikely to be built,” said Driscoll. “The high netbacks available in consuming regions (e.g., the Northeast and California) may not be sufficient to overcome local political concerns.”

Since an explosion in January killed 25 workers at an Algerian LNG export terminal, concerns have grown substantially regarding the safety of LNG terminals, particularly near populated areas. There also have been concerns that terrorists could be transported to the United States aboard LNG tankers.

Driscoll noted that there have been rumors of potential regulatory delays at the Federal Energy Regulatory Commission (FERC) because of the results of a recently sponsored report on LNG safety published by ABS Consulting. The report titled “Consequence Assessment Methods for Incidents Involving Releases from Liquefied Natural Gas Carriers” recommended techniques for modeling LNG spills. Rumors circulated that FERC might delay LNG certificates on the pending LNG projects at least until the end of the year.

At a regular Commission meeting last Wednesday, FERC spokesman Bryan Lee said those rumors simply were not true. He said comments on the safety report would not “unduly delay” the regulatory review on any of the projects.

Lehman Brothers sees the Gulf Coast, Baja California and eastern Canada as the most likely locations for proposed terminals to go forward. Driscoll said there are three main reasons he picked those areas: Close proximity to pipelines and customers; close industrial markets and less potential for public opposition; and more locations that are remote from residential areas.

“The public, in many parts of the country, is uncomfortable living in close proximity to large industrial facilities, and safety fears — even if overblown — can find a perceptive audience,” he noted.

He expects only two new terminals to be on line in 2008. And he sees a consensus developing that no more than six to 10 new terminals out of the 40 proposed will be built over the next 10-15 years. By 2015, Lehman Brothers expects a total of 10-14 import terminals to be operating.

Driscoll also has cut his short-term LNG supply forecast by 200-600 MMcf/d (2004-2007) because of “expected” expansion delays at Elba Island and the other terminals. No delays, however, have been announced.

El Paso’s Elba Island terminal has a current sendout of 440 MMcf/d and will add an incremental sendout capacity of 360 MMcf/d in the first quarter of 2006 along with an addition 3.3 Bcf of storage space. But Driscoll has forecast a construction delay at Elba Island, saying the new capacity won’t enter the market until 2007.

El Paso confirmed on Friday that the expansion project is moving along on schedule. “It will be online in the first quarter of 2006,” said spokesman Aaron Woods.

Dominion is planning to add 800 MMcf/d of deliverability by 2008 bringing its total sendout to 1.8 Bcf/d. But Lehman Brothers is assuming all of that new capacity won’t hit the market until 2010.

Southern Union’s Lake Charles terminal soon will begin a two-phase expansion that will add 970 MMcf/d of sendout by mid 2006, but Driscoll also has pushed back the expected completion of the second phase of the project to 2008.

Despite his pessimism about the timing of the expansions and the number of new projects, Driscoll still cannot deny that LNG supply will rise sharply in the long run. Even with what some would consider overly conservative estimates, Lehman Brothers still expects LNG supply in 2010 to show an increase of 285% compared to 2003 levels. The Energy Information Administration is projecting that LNG imports in 2010 will average 5.9 Bcf/d compared to 1.4 Bcf/d in 2003, a 320% increase.

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