The worldwide liquefied natural gas (LNG) business is in a state of rapid growth and flux, and the U.S. marketplace is guiding it, according to Gabriel Avgerinos, general manager of LNG and gas consulting at Poten & Partners in New York. Speaking on a panel at GasMart/Power in Reno, Avgerinos predicted that a massive expansion of LNG trade and imports will take place over the next decade as long as U.S. gas prices remain above $2.50/MMBtu.

Although high North American gas prices may be the prime mover behind global LNG growth, changes in LNG costs and supply have been major factors as well, he said.

“Size is up; costs are down,” he said. “The reason is plain and simple: competition.”

“Facility production costs are down 30-40% right now, and they are down in all parts of the production train,” he said. LNG production plants have more than doubled in capacity. They used to produce two million tons of LNG per production train, but today they are up to about 4.5-5 million tons per train.

Shipment costs are down, too. One ship used to cost $250 million to build in the late 1990s. Today it costs only $165 million. In addition, ship size is up from 125,000 cubic meters (60,000 metric tons) to 140,000 cubic meters of LNG, said Avgerinos.

There are more providers of engineering services and shipyard services. Today, there are five service contractors that are building production plants as opposed to two only five years ago. “KPR and Bechtel are at the top of the list,” he said. “They have lowered costs and forced prices down.”

Shipping costs came down primarily because Korea got into the business. “They built 15 ships in five years and forced Japan to lower its ship costs.”

In addition, the majors have turned their focus worldwide to greater natural gas production and are looking at LNG shipping as a viable transportation option. Government-owned national oil and gas companies in other foreign countries are doing the same.

Financing also has come of age in LNG, said Avgerinos. “Not only are commercial and investment banks now willing to invest in LNG project finance, but also export credit agencies. Even bond financing is an alternative.”

The global LNG business is changing from a really small club of companies to something that supports multi-lateral trading. “We now have something like 14 countries with potential supply of LNG and 40 demand or import locations. The projects are starting to commit to a 4 million ton LNG train before they actually have negotiated the long term sales for that train…

“I think LNG is well on its way to becoming commoditized,” he said. “The proof in the pudding is what is happening in the United States.”

However, that doesn’t mean in five years you’ll find a liquid LNG market. “That just can’t happen with something that has such big price tags,” he noted. “It’s going to be a market with a risk, project financing requirements, long-term contracts, medium term contracts and spot cargoes. I think the U.S. is what is going to drive this thing.”

Today’s LNG market is a buyers’ market in contrast to only a few years ago, said Avgerinos. A new model has developed over the last two years. Rather than all long-term agreements, buyers today are signing portfolio agreements with a variety of terms and provisions. In contrast to a few years ago when LNG was priced based on alternative fuels, LNG prices today are based on a basket of natural gas and alternative fuel prices. LNG contracts no longer have a single supply source and delivery point specified; they have multiple sources and delivery locations.

Avgerinos said he expects there to be a tripling of LNG trade in the Atlantic basin to 100 million tons by 2010 and a doubling in the Asia-Pacific region to 135 million tons. New supplies are coming on line in Trinidad, Nigeria, Algeria, Egypt, Qatar and Norway, just to name a few. Other newer supply projects are being planned in Venezuela, Angola, Egypt and Nigeria.

“There’s a wave of LNG that’s in the process of being monetized and placed into construction.” There are more than 38 million tons of LNG expected online by 2010 that’s not covered by demand agreements, he said.

In 2000, about 0.2 Tcf of LNG was imported in the United States, but 0.8 Tcf is expected to be imported in 2010. “That translates into about 17 million tons of LNG. To you, that may seem like small numbers but to us this is huge,” he said.

The question is whether there will be enough infrastructure in the United States to bring in all this new LNG supply. Avgerinos said the current import terminals theoretically could be able to handle the increase with moderate expansions, some of which are already planned. These include the following existing terminals: Cabot’s operating terminal in Everett, MA; El Paso’s recommissioned terminal Elba Island, GA; William’s terminal in Cove Point, MD (expected to be operational later this year); and CMS’s terminal in Lake Charles, LA. However, there probably would be downstream transportation constraints at least some of those locations. It is more likely that additional terminals will be required, and there are plenty of them planned, including three in the Bahamas, several along the Gulf Coast of Texas and Louisiana and more in Mexico.

“The fact that we had $10 gas prices helped, but a lot of these projects are now saying ‘lets reevaluate this.’

“I’m a little skeptical of offshore systems,” he said regarding the Bahamas’ projects planned by El Paso, Enron and AES. The downside of building facilities along the Gulf Coast is they are far away from the market, he noted. However, forward prices in the market could justify building many of these proposed terminals, setting the stage for a significant new source of supply for the burgeoning domestic natural gas marketplace.

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