The gas market, particularly in the Northeast, got a little scare last week when striking tugboat workers shut down liquefied natural gas (LNG) shipments from Trinidad, the largest LNG exporter to the United States, for two days.

But by Wednesday, the strike, which was over wages, had ended and 1.7 Bcf/d of gas was being shipped again to the United States, Spain, Puerto Rico and the Dominican Republic.

The short-lived event had minimal impact on the U.S. gas market, but some saw it as a warning sign of the new supply risks the United States will face in the coming years as LNG makes up a growing portion of the supply mix. As one producer of competing Rocky Mountain supplies put it last week, “Now tug boat captains are going to determine the price of gas in the United States.”

“There are some gremlins behind the scenes with LNG, but they are not problems that should make the industry shy away from developing LNG trade,” said Scott DePasquale, a consultant with Energy Security Analysis Inc. in Boston. “They are just problems that should make you consider how you are going to structure long-term LNG contracts and estimate what kind of premiums you are going to pay over indigenous pipeline supply.”

Some industry sources have likened a new LNG import terminal to bringing a large new field into production. It will have its own set of problems, just as domestic and Canadian production can be shut-in by wellhead freeze-offs in the winter and pipeline supplies can be hindered by compressor problems, leaks, constraints or ruptures.

There are different risks associated with LNG than with indigenous pipeline supplies. With LNG, there is geopolitical risk. Although many of the countries that supply LNG aren’t politically unstable, there’s always the possibility that a government could step in and change the taxes or financial structure that governs LNG exports.

There was a separate strike last week involving contractors who were developing Atlantic LNG’s fourth liquefaction train. The contractors are attempting to pressure the government into increasing the minimum wage for energy workers. Train 4 is scheduled to start up in 2006 with a capacity of 800 MMcf/d, which will raise Trinidad’s export capacity to more than 2 Bcf/d, most of it bound for the United States.

Those campaigning against increased imports point to potential for delays associated with shipping. By 2015, there will be significant LNG shipping traffic in certain locations, particularly in the Gulf between the Houston Ship Channel and Lake Charles, LA.

On the other hand, LNG supply is desperately needed in the United States because gas prices have soared to more than $5/MMBtu and domestic production is becoming inadequate to meet rapidly rising demand. While LNG has its own set of risks, more and more countries are developing LNG export facilities and there are projections of a worldwide LNG surplus, which will give importers a variety of options, including spot purchases if future baseload LNG is hindered by a strike or other event. LNG also will put downward pressure on gas prices in the United States.

About 1.4 Bcf/d of LNG currently is imported by the United States through four import terminals: Tractebel’s terminal in Everett, MA; Dominion’s Cove Point, MD, terminal; El Paso’s Elba Island terminal near Savannah, GA; and Southern Union’s Lake Charles terminal in Louisiana.

Last week’s incident constrained supply only slightly and mainly was felt at the Everett, MA, terminal, DePasquale said. However, utilities in the Northeast and Mid Atlantic have been relying on LNG deliveries not only as an important peak supplement to their overall supply mix, but also as storage supply. LNG remains cheaper than current pipeline supply.

“Using LNG as a baseload resource isn’t something we’re doing right now; it’s still peaking so I don’t know that this [type of event] would create an awful lot of market tightness [in the near term],” said DePasquale. “I do think that 10 years from now a strike like that could have a significant impact on prices because although we’re at less than 2% of demand served by LNG now, we are expecting that to grow to 10% of demand between 2010 and 2014.”

Fifteen additional LNG import terminals have been proposed for the Gulf Coast and offshore Gulf of Mexico, and nine more for the Atlantic Coast of the United States, Canada and the Bahamas. Not all of them are expected to be built.

Although LNG remains a small portion of overall U.S. gas supply today (1.4 Bcf/d in 2003 compared to 53 Bcf/d of domestic dry gas production and 60 Bcf/d of total demand), it provides a significant supply alternative and it is going to become more important with each additional LNG terminal that’s built.

The Energy Information Administration expects net LNG imports to rise to 1.75 Bcf/d this year and to 2.06 Bcf/d in 2005, with Trinidad making up a large portion of those totals. Consultants at Energy and Environmental Analysis Inc. in Arlington, VA, said recently that they believe LNG will grow to 5.5 Tcf/year (15 Bcf/d) by 2020. DePasquale predicts that by 2014 at least 3-3.5 Tcf/year (8.2-9.6 Bcf/d) of LNG will be entering the United States, which will amount to about 13% of total demand.

“We’re really expecting LNG to see 10-fold growth, but how are they going to schedule all those tankers? There are bound to be scheduling and maintenance issues,” said DePasquale. “There’s always the potential for another explosion like the one that took place in Algeria,” and there’s going to be a price premium for the new risks.

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