Looking into the crystal ball of what implications LNG will have on conventional domestic gas sources, Raymond James analyst J. Marshall Adkins said it will depend on how much of the new gas is brought in, on what timeframe it arrives and how much it will cost.

Looking at the timeframe that runs through 2010, Adkins noted that to address the amount of LNG that will be brought in, one first has to figure out how many current proposed projects will actually go through. In total, there “have been a staggering 30 new LNG terminals proposed over the past few years representing as much as 25 bcf/day of additional LNG capacity,” Adkins said. “Of course, most of these are not realistic.”

After investigating all of the proposals, the analyst said it looks as though there is only about 1 Bcf/d of add-on LNG capacity that is currently under construction (including the recently opened Cove Point facility). He noted that these are actually just expansions to existing facilities and most should be in full operation by the end of 2004, while additional proposed expansions could bring on another 2 Bcf/d of capacity by the end of 2006.

With regard to greenfield projects, there has only been one of these proposed U.S. LNG facilities that has received regulatory and environmental approval by the Federal Energy Regulatory Commission (FERC). There have also been an additional 8 to 10 Bcf/d filed with FERC but not yet approved. Raymond James used approximate numbers as LNG announcements seem to “hit the tape” on a daily basis.

In Adkins “optimistic” case scenario for future LNG imports into the U.S., there will be a large jump in LNG imports in 2007 as the first proposed greenfield projects begin to hit. “We call this our ‘optimistic’ case because it assumes no construction or permitting delays,” he said.

However, the analyst said the probability and time frame for the greenfield projects is much more difficult to determine. Using Sempra’s Cameron LNG project at Hackberry, LA as an example, Adkins noted that the FERC filing and application process took well over a year due to various environmental concerns. “Given usual construction delays, it may not be until late 2007 when this facility really begins to contribute to U.S. gas supply,” Adkins said. “These types of issues will likely plague greenfields throughout the entire planning and construction phases.”

In addition to the red tape issue, there is also a lack of tankers to transport the LNG supplies. Adkins said there are currently 140 tankers delivering 14.5 Bcf/d to global markets, but projections show that that number will need to nearly double in the next five-seven years to accommodate the proposed increases in North American LNG.

“At roughly $160 million a pop, this is no small feat. That being said, there are currently about 50 tankers on order or optioned through 2006,” he said, noting that all these numbers are moving targets as well.

“When considering the approval process, environmental and political hurdles, construction logistics, and transportation availability, it would seem that planned capacity additions could take considerably longer than expected,” Adkins said. “Even using conservative assumptions, we doubt meaningful LNG flows will hit U.S. hubs before late 2007 or early 2008.”

Going beyond capacity restrictions, Adkins said the most important part of the LNG equation is the economics. Setting terminal and ship building costs aside for a moment, Adkins said the two biggest question marks are the price of gas at the liquefaction plant (or country of origin) and the cost of regasification.

“The costs of gas at the country of origin are currently assumed to be relatively low given the large amounts of ‘stranded’ gas in areas such as Trinidad & Tobago (T&T), Qatar, Russia, West Africa, and the South Pacific,” he said. “That being said, increasing global trade and new pricing strategies from these areas will likely lead to higher prices for this gas over time. In other words, as global demand for LNG increases, the supplying nations will likely ratchet prices higher.”

One of the only ways to get a sense of what LNG will cost is to look to other major importers of LNG, namely Japan, which stands as the largest importer at approximately 7 Bcf/d. This accounts for over half of the worldwide LNG demand, which currently stands at approximately 14 Bcf/d. Current U.S. imports are currently only about 0.7 Bcf/d.

Adkins said the landed price of LNG in Japan has been well above $4.50/MMbtu for the past three years. Adding re-gasification costs of about $0.40/MMbtu and Japan’s total costs of LNG have been over $5/MMbtu for the past three years. Assuming a BTU parity price with oil, landed LNG cost in the U.S. by 2008 would be over $5.00 if oil were trading in the $40/Bbl range.

“Ultimately these factors suggest that North America will be on its own for awhile as LNG will not be a quick fix, but a longer term supply solution,” he said. “More specifically, we believe that it is unlikely that LNG will alleviate the domestic production short-fall until at least 2007.

“In the meantime, expect gas prices to reflect a tight market for at least the next three to five years,” Adkins added. “Additionally, the minimal economic hurdle rate for LNG to hit our hubs suggests a ‘global’ gas price that ultimately will be tied to global oil prices. Even if oil prices remain in the mid $20 range, this implies longer-term landed LNG costs well above $4.00/Mcf.”

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