In North America, development of liquefied natural gas (LNG) infrastructure is a bit like the weather: wait a while and it will change. An industry once intent on importing LNG to the United States five years later is equally enthusiastic about exporting LNG from North America.

However, would-be LNG exporters should do their due diligence on global prices and energy supply-demand dynamics, Calgary-based Ziff Energy Group’s Bill Gwozd told NGI. While exports are expected to lift domestic gas prices, it won’t be by much, and the upward pressure won’t be as significant as that from power generation demand for gas, Gwozd and Center for LNG President Bill Cooper said.

Calling himself a “dream-crusher” when it comes to investors wanting to throw billions of dollars at North American energy infrastructure projects, Gwozd, Ziff vice president for gas services, said he is bearish on Gulf of Mexico (GOM) export projects and bullish on West Coast projects, which he said can more easily reach lucrative Asian gas markets.

Citing current average Asian LNG prices of $14/MMBtu compared with $8-9/MMBtu in Europe and less than $4/MMBtu in the United States ($3.50 at Henry Hub), Gwozd said the “economic driver of taking $3.50 gas from North America and selling it into a $14 market is very, very appealing.” So, like the real estate bromide of “location, location, location,” he said LNG exporters need to think of “location, location, location.” And he thinks that means the West Coast.

“So the winner of the location ticket has to be Apache, Encana and EOG [three partners in the proposed Kitimat LNG export facility on the West Coast of British Columbia] for their astute decision to site an LNG facility on the west coast of Canada where there is easy access to Asian markets,” Gwozd said. In fact, several projects are in the works to export LNG from Western Canada (see NGI, Oct. 24, 2011).

Projects on the U.S. Gulf Coast are at a disadvantage because the price of gas is higher in the United States than Canada, Gwozd said. Additionally, tankers leaving the Gulf Coast “have to go farther and figure out a way to get through the Panama Canal.”

However, a project to expand the Panama Canal, allowing for the transit of larger tankers, is under way and expected to be completed in 2014. Also working in the favor of Gulf Coast projects is the fact that those proposed would be sited at existing regasification/import facilities, said Cooper. This makes their economics more attractive than greenfield projects because they can use existing LNG storage tanks. It also eliminates much of the friction with regulators and the public with regard to safety concerns, he said.

“…[S]o vapor exclusion zones, setback requirements, dispersion models, all that type of stuff is based upon not whether you’re regasifying or liquefying; it’s based upon what’s in storage on the site,” Cooper said. “They’re not adding any new storage; they’re just taking advantage of what’s already there so the concerns aren’t nearly as great.

“You see that too because the facilities are already there. You use the existing jetty; the pipelines are the same. You’ve got to put some liquefiers in. The water suitability assessments have already been done. It doesn’t matter much to [regulators and the public] whether it’s coming in full and leaving empty or coming in empty and leaving full.”

Still, according to Gwozd, the economic analysis for U.S. GOM gas traveling to Europe is less appealing than the analysis for taking Canadian gas to Asia. “I’m encouraging folks to do the due diligence, run the economics, not the dream,” Gwozd said.

“Right now the LNG import sector is more like a nightmare,” he said, noting that total U.S. LNG import capacity is nearly 20 Bcf/d and last year the average load factor for all the terminals was 1.2 Bcf/d. The highest load factor was at the Everett, MA, terminal at 39%, or about 390 MMcf/d in a 1 Bcf/d facility; the next closest U.S. terminal was Elba Island, GA, at 13% load factor, Gwozd said.

Four years ago, Gwozd and Ziff Energy were leading the chorus of cheers for robust growth in LNG globally and in the United States. A Ziff report projected worldwide LNG trade to double to 50 Bcf/d by 2015, and the U.S. market was going to be part of that rapid growth. But will many of the proposed export terminals ever be built? And would the exports drive up domestic gas prices?

“The short answer [for both] is yes,” Gwozd said. “I think the government will look at it as kind of neat; these guys [export developers] are providing optionality to producers at no extra cost to the government.” And more gas-to-liquid (GTL) facilities, fertilizer plants and tar sand gas to aid oil production are all outlets for the producers to sell more gas, too. “Why wouldn’t [the U.S.government] want to approve exports? At the same time, other countries will be building more liquefaction plants to market their gas, so we’ll have more LNG coming out of Nigeria and Qatar and Iran.”

Gwozd thinks LNG exports will help drive up natural gas prices in the United States, but the major factor affecting future gas prices, which he thinks will be well above the $6 mark by 2020, is the power generation market. In Ziff Energy pricing models power generation is a three or four times more significant driver of natural gas prices than LNG exports.

“Our model says for every 1 Bcf of LNG exports, North American gas prices will increase by 22-23 cents,” he said. “But in this regard, LNG exports are no different than a new fertilizer plant or new petrochemicals facility on the Gulf Coast or a new GTL plant. They all take natural gas, consume it and create other products from it. These are all increasing the demand for gas.”

A recent study by Deloitte found that exports would result in a modest increase in U.S. gas prices, felt most acutely near the Gulf Coast (see NGI, Dec. 19, 2011).

Gwozd said he thinks the full-cycle cost of natural gas in North America and the long-term price of gas will converge. “In other words, the cost to manufacture natural gas and the price of gas should be in balance. I think the price of gas will rise fundamentally and primarily due to the change in carbon policies and issues related to power plants.”

If North American LNG enters the global market, it likely won’t drive the global industry away from oil-indexed prices, Cooper said.

“The addition of U.S. gas in the global LNG marketplace certainly can provide some optionality for customers,” he said. “As we are sitting here today, I don’t look at that and say it would have a drastic impact on pricing of LNG on a global basis. I don’t believe that the presence of U.S. LNG in the global marketplace will be the sole determining factor of whether we see a drive toward gas-indexed pricing for LNG or oil-indexed pricing. I think the factors that drive that are far greater.”

In related news, backers of the Crown Landing LLC LNG terminal, proposed for the Delaware River in Gloucester County, NJ, have thrown in the towel and plan to surrender the certificate granted by the Federal Energy Regulatory Commission (FERC) in 2006.

“During the past two years the combination of the significant increase in natural gas production from North American shale resources, which has resulted in lower [gas] prices, and the growth in demand for LNG in the rest of the world make it unlikely the company can secure supplies of LNG on economic terms attractive enough to ensure the sustained profitability of the project at the proposed site,” Crown Landing CEO Gordon Shearer told FERC in a letter. “As such, the company has elected to abandon development at this site.”

Crown Landing had sought several deadline extensions at FERC; the most recent was last May when the company asked the Commission for a one-year extension so it could revise its vapor dispersion model (see NGI, May 9, 2011). An affiliate of Hess LNG acquired the Crown Landing project from BP plc in late 2009 (see NGI, Nov. 9, 2009). Hess last June also withdrew its application to construct Weaver’s Cove LNG in Fall River, MA (see NGI, June 20, 2011).

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