You probably don’t need a pocket calculator to determine that the market isn’t exactly ready right now for imported liquefied natural gas (LNG). But according to a new study by PIRA Energy Group, prices should average more than $3/MMBtu at the Henry Hub through 2015, creating an solid market over the long-term in the United States for a worldwide LNG supply that is expected to more than double over the next decade.

“The way the market looks right now, the pendulum has definitely swung toward Europe in terms of where the incremental tanker of LNG is going to go because European prices are at least $1 higher than the United States, which is a huge shift from last year at this time,” said Ira R. Joseph, director of international gas at PIRA and co-author of the Atlantic LNG study. “That’s why you are seeing CMS Energy deals to Belgium and France and the [other deals] between Algeria and Spain.”

With Henry Hub prices plummeting to $1.91 Monday on the New York Mercantile Exchange, there aren’t that many LNG suppliers out there eager to ship gas to the United States. “But it’s very difficult to generalize about term contract volumes and spot volumes,” said Joseph. “You have situations where you could even see spot volumes coming in at extremely low [price] levels depending on who the supplier is. It depends on a lot of different things, which is why we developed software that is online for calculating LNG netbacks between any one source and any one destination. You can do your own scenario for what you believe the threshold is.”

PIRA’s new study, “Atlantic Basin LNG: The Next Commodity Market,” comes with software that is designed to help people in the industry assess the financial consequences of a liquid Atlantic Basin LNG market on natural gas assets, including trading activities, basis management, shipping, liquefaction costs, liquids credits, acquisitions, expansions, and development of power, petrochemical, or water desalination projects. PIRA has gathered data on all existing trades, and the software will allow a user to customize various elements of the calculation just in case a particular view is different than PIRA’s. Using either PIRA forecast prices, futures prices on the NYMEX and IPE, or your own price input, the software can calculate netbacks, profit margins and potential arbitrage opportunities in the emerging LNG business.

Joseph said despite the tremendous interest in LNG over the last year, PIRA still sees a tight LNG supply market through 2005. After 2005, however, supply is expected to increase sharply. Currently there are 128 LNG tankers on the world market, but there are 49 new tankers on order and options for another 35 tankers to be built, he said. Worldwide LNG supply is expected to grow to 18 Bcf/d by 2010 from 8 Bcf/d today.

“Our long-term price forecast (2015) is for U.S. prices to be above $3 (Henry Hub). The price forecast for Europe is actually higher…above $3.50/MMBtu.” Even with the bullish forecast, however, PIRA still expects only a couple of the proposed LNG import terminals in the United States to be built. “We don’t see a lot of the new terminals that have been announced ever being built, except possible Radio Island, NC, [and one of the two projects in the Bahamas] although we do see major expansions at the existing terminals.” The market situation and permitting issues don’t favor the new terminals, he said. Joseph said PIRA does think one LNG import terminal will be built on the Gulf Coast of Mexico.

“Many people thought that the boom in interest in LNG was a response to last winter’s gas prices in the U.S.,” said Thomas A.Z. Howard, managing director of strategic products at PIRA and one of the authors of the study. “While there is a grain of truth in that, LNG suppliers continue to be interested in the Atlantic Basin when prices are closer to $3, as long as sustained prices do not fall to $2 or lower, which we think is unlikely.”

For more information on the study, contact Jeff Steele at PIRA at jsteele@pira.com or (212) 686-6808.

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