A large number of companies want to bring a lot of liquefied natural gas (LNG) to North America over the next few years. However, the reality is not a lot of projects will make it past the drawing board, and world LNG supplies are limited and in demand by other countries. Nevertheless, since its rebirth in the past few years, LNG is now being touted as the “next” energy commodity, the saviour for North America’s dwindling natural gas supplies and growing demand, and companies both large and small are getting in on the act.
By most estimates, more than 40 receiving terminals are currently proposed (see NGI’s special report on North American LNG Import Terminals at https://intelligencepress.com/features/lng/ and related table at the end of this issue of NGI’s Daily GPI), and if every single terminal were built and all of the capacity were used, North American LNG output would reach more than 47 Bcf/d — or well more than double the 18 Bcf/d now used worldwide. The U.S. market is pulling about 2 Bcf/d of LNG currently, compared with 600 MMcf/d in 2002. It’s obvious that the incredible amounts of LNG and number of terminals proposed is not realistic. But what is?
“Our view is that the ability to produce in North America is declining, and frankly, the alternatives are not very good,” said Robert Ineson, director of North American Natural Gas for Cambridge Energy Research Associates (CERA). “So, it’s going to have to be that we import gas whether we like to or not. We see gas today as roughly where oil was in the 1980s…a boom then where we had a rig count that was 4,000 and flat production. And we did get a supply response from imports. We have a lot of existing gas production in Alaska, but it can’t go anywhere. We’re not running out of gas worldwide, and LNG right now appears to us to be cheaper than an Alaska pipe.”
Where, oh, where will the terminals be?
Most of the U.S.-based consultants and think tanks following LNG growth do not believe North American capacity can grow nearly as much as proposed. “There is support for more than 10 Bcf/d, and up to about 13 Bcf /d within the next few years,” said Ineson. “I tend not to look at it in terms of sizes. We’re not as concerned with the number of terminals that may be built as the amount of capacity each terminal would add.”
Ineson said CERA has reviewed proposals for import terminals that would have relatively small amounts of LNG capacity up to terminals as large as 2.6 Bcf/d. Along with the greenfield proposals, three of the four existing U.S.-based LNG receiving terminals also are in the process of expansion — which will add substantial amounts of capacity. However, “significant” greenfield construction is expected, he said. “There are reasonable places to put gas in the grid. The biggest problem is how few are under construction.”
With all of the talk of new facilities, there won’t be a new one in North America before 2007 — at the earliest. And that is worrisome. “The gist of the story is what we’ve been telling everybody…we’re charting a path,” said Ineson. “We’re in for a period when the U.S. gas market will be very tight pending the arrival of more LNG.”
CERA has advocated an LNG imperative worldwide to achieve “40 in eight,” which means the need to construct as much LNG capacity in the next eight years as the global industry as built in the past 40 years. By 2012, CERA has forecast that another 140 million tons of LNG production capacity is needed if the industry is to meet expectations.
But where would LNG import terminals likely be sited?
“We often make the statement that LNG will go where it can, not necessarily where it should,” said Ineson. “The ones that attract supply will be the ones that get built.”
Overall, the Gulf Coast has been more receptive to energy infrastructure, he noted. “People are more familiar with it, and frankly, there’s a lot of pipe and gas demand in the area. However, if you lay out the nation and talk about supply deficits and you want to find out where there is a deficit, it’s in the Midwest and the Northeast.
“Gas is well piped into the Midwest, but you have to get supply to it,” said Ineson. “There’s no coast. Arguably, a very good place to put a terminal is in New England…it’s also closer by ship than most places and there’s a savings there. In New England, though, you have to deal with some of the infrastructure issues and pipeline capacity. The problem is, first of all, is that it’s a very crowded area, and it’s hard to find a site. Second, there’s a lot of public apprehension about LNG, some based on misinformation. It’s a real thing that has to be dealt with.”
There most likely will be a new terminal on the East Coast — perhaps along the East Coast of Canada. The bulk of new construction, however, is destined for the Gulf Coast.
Suppliers or Operators?
Would new LNG terminals operate simply as suppliers or serve as operators? For example, Freeport LNG, owned by producers ConocoPhillips, Cheniere Energy and Contango Oil & Gas, is one of the few terminals to be approved so far by the Federal Energy Regulatory Commission. ConocoPhillips has signed up for the capacity, meaning it will be responsible for lining up LNG supplies and marketing the gas. Other planned terminals — such as the Golden Pass terminal proposed by ExxonMobil in Sabine Pass, TX, would most likely support some of the oil major’s refinery operations. And ExxonMobil already has lined up supplies from its operations in Qatar. Other LNG going into the Gulf Coast would likely support some of the area’s huge petrochemical operations.
“We see a mix of signing up and operation,” said Ineson. “When we’re talking about a developer, they’re going to want to toll the plant,” but producers may want to manage operations, supply and sales as in the Freeport project, where the largest capacity is going to ConocoPhillips, which also will manage the construction. “We tend to think that having a firm arrangement with customers in the market,” is the right business model, Ineson said, but “that model is going to be very hard to come by in LNG. The traditional LNG business model doesn’t work for the U.S. — customers won’t contract very willingly. Here, you have to figure out which party has the money, which has the project expertise, and where to put the risk.”
CERA sees a role emerging for large international companies to serve as LNG intermediaries in the United States. In all cases, said Ineson, they would have to have “pretty good balance sheets.” Both ChevronTexaco and ExxonMobil have pointed out the importance of having upstream resources in a worldwide seller’s market for LNG.
Porter said LNG projects have become attractive to U.S. producers because it “provides a great opportunity…to monetize reserves that would be stranded. With the current high prices in North America, LNG offers profitization for them. One thing you have to remember with LNG, is that to sign up an LNG contract, a long-term contract, takes a lot of credit and you need to have firm supply. That’s were producers fit in.”
Large-scale financial LNG projects in the deregulated United States’ markets are not yet tested in money markets, according to CERA. The LNG projects represent an unknown area that could involve commodity price risks different from traditional long-term contracts common in other parts of the world. These price risks with the long-term arrangements for LNG supply and the long-term buying commitments required for LNG projects have to be reconciled.
Players with “enormous balance sheets, a high tolerance for risk and a long-time horizon” hold significant advantages — a good fit for cash-rich, big-picture producers.
Possible LNG Shortages?
With more North American demand sure to be a part of the energy mix in the next few years, “it is certainly possible” to see LNG shortages,” said Ineson. “These are ‘lumpy’ projects. There’s plenty of gas; the trick is turning it into supply. That’s the problem. There has to be project management. You’ve got to have money to build them, and they need to work with the government. This needs to be done right now.”
Imports are also growing in Asia — the top importer has been and remains Japan. LNG demand also is on the rise in Europe. And now, the United States has quickly moved into the top five among LNG importers, said Ineson, because of rising gas-fired generation demand and flat or declining production.
Right now, most of the imported LNG is going to the Gulf Coast. In 2003, said Porter, Ziff Energy Group estimates that about 500 Bcf of LNG was imported into the United States, with 51% to the terminal in Lake Charles, LA; 30% to Everett LNG in Boston, MA; 11% to Elba Island in Georgia, and 8% to Cove Point LNG in Maryland (which only started import operations in September 2003). All except the Everett terminal are currently undergoing expansions. Trinidad/Tobago imports account for about 75% of North American imports Another 10% of the LNG comes from Nigeria and Algeria, and the rest is from a “mixture” of other sources around the world.
An interesting historical note is that if there had not been an LNG boom that fizzled in the 1980s, there would be very little LNG arriving in the U.S.now. The Lake Charles, Elba Island and Cove Point terminals all were built in the late 1970s and early 1980s and almost immediately mothballed and written off for nearly 20 years until import operations were revived between 1997 and 2003. Putting those terminals back into operation was a much less costly and time-consuming process than that faced by the current greenfield projects. The Distrigas terminal in Boston Harbor has operated continuously since 1971.
Ultimately, more LNG terminals will have an effect on gas prices. “It will take several terminals to accomplish this and it will take time,” said Ineson. “There is no quick fix here, and it will take multiple years and perhaps even beyond the end of the decade. Optimistically, new LNG could affect prices by 2008, but likely, it will be after that.”
Ziff also sees LNG affecting U.S. gas prices by 2010. “When you bring more supply in, whether it’s from Alaska, LNG or deepwater Gulf gas, the new supply acts as a floating pendulum and it grinds the price down,” said Porter. “That’s the concept. Ziff Energy developed a price model view that the gas market is not at equilibrium. Ziff believes prices oscillate because of uneven supply. And LNG is one that will cause the prices to oscillate.”
Another huge issue for siting new LNG facilities in the United States will be in improving the public’s confidence in their safety, according to Dr. Michelle Michot Foss of the University of Houston’s Institute for Energy, Law & Enterprise. Security and safety issues are paramount in building LNG terminals, she said. Without the public’s support, there will be unnecessary delays and even cancellations that could prevent critical infrastructure being built. And that is a problem that the experts say has to be solved quickly.
“There is a fear of catastrophic failure,” said Foss. “Vapor clouds, pool fires. There is still an inability to communicate probabilities…and there is a high degree of emotion.” She noted that the LNG is “not without incidents, but it has maintained an enviable safety record over the past 40 years.”
Also critical will be maintaining effective relationships with producing countries, said Foss. “The development of natural gas worldwide is not only beneficial to consuming countries, but also to producing ones. Developing of LNG will help to reduce flaring. The LNG value chain will stimulate additional E&P investment for natural gas worldwide, and help to support development of domestic markets for natural gas, including gas-fired generation, in producing and exporting countries.”
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