Proposals for LNG Terminals Surge

By Ron Nissimov, Associate Editor, LNG Daily

Sixty-four projects under consideration in North America

THE UNITED STATES, CANADA, AND MEXICO are saturated with liquefied natural gas import terminal proposals.

Some 64 North American projects are either approved, under regulatory agency consideration, officially proposed, or identified. Of the 64 sites, 49 are proposed projects in the United States, of which 13 hold one or more approvals, either from the Federal Energy Regulatory Commission or another U.S. agency.

In Canada, two terminals have been approved, and another five potential sites are identified. In Mexico, three terminals have been approved and another five are considered potential.

Additional proposals are frequently put forward by developers and more are expected in North America.

Six terminals are operating on the United States: one on the Louisiana Gulf Coast, one offshore Louisiana, three on the East Coast and one in Puerto Rico. How many projects might be built in the United States? Industry analysts suggest perhaps only 12 of the 49 terminals being considered will ever be built.

But construction of only a few of the proposed projects does not negate the role LNG will play in the energy mix of the United States. The country can't find or produce enough domestic gas to lower prices and meet demand, industry experts say.

"As the economy grows, energy consumption grows with it," said Chris McGill, the American Gas Association's managing director of policy analysis. "We have to find a new supply of gas to meet the demand requirements."

Ranking of companies cited in article among top 250 global energy companies Source: www.top250.platts.com

Despite the aggressive response by U.S. gas producers to higher gas prices, domestic production is expected to remain flat, said Michael Zenker, managing director of global gas for Cambridge Energy Research Associates. Even the addition of proposed supplies from Canada's Mackenzie Delta and Alaska's North Slope are not ample to meet anticipated demand. "The supply response is not enough," he said.

The incentive for producers is there. U.S. spot gas prices were higher on average during the winter of 2005–2006 than any heating season since gas markets were deregulated in the mid- 1980s, according to data compiled by Platts. The average wholesale price for the November-through-March period was $9.26/mmBtu—43.1% higher than the $6.47/mmBtu average during the 2004–2005 winter and 81.9% above the $5.09/mmBtu average for the five winters beginning in 2000–2001.

According to Sara Banaszak, senior economist of the American Petroleum Institute, "We will need all forms of gas to get us into the future. You can't drill your way out of this." She said the United States should quickly increase its LNG import capability to ensure supply "flexibility. The more we can build the LNG infrastructure, the better we can respond in the future."

Easier Said Than Done

Any LNG terminal project approved by FERC, for example, must also obtain clearance under the Coastal Zone Management Act, a water quality certificate, and dredging permits, among others. The next hurdles involve complex financing arrangements, gas supply, and other market issues. As FERC officials frequently state, "The market ultimately determines whether an approved LNG terminal is ever built."

But strong LNG imports suggest lower U.S. gas prices, say experts. Prices at Louisiana's Henry Hub—the largest centralized point for natural gas spot and futures trading in the United States and the site used by the New York Mercantile Exchange as the point of delivery for its natural gas futures contract—could fall below $5/mmBtu between 2008 and 2010 as increasing amounts of LNG from Gulf Coast import terminals enter operation, said Robert Ineson, Cambridge Energy Research Associates director for North American natural gas.

LNG terminals now under construction promise the addition of 8.5 billion cubic feet per day (Bcfd) of new supply into North America beginning in 2008. "This is a very material amount and it's significant because there is no 'Plan B' for increasing supply," Ineson said. "Sustained natural gas price relief can occur only when demand is permanently destroyed or when substantial new sources of supply become available," he said.

The higher gas prices of the past several years have "pared" industrial demand to a "toughened core," but residential, commercial, and power sector demand will remain high despite prices. Given the lack of near-term alternatives and growing demand for power, the electricity sector's appetite for gas will grow "despite ongoing gas price strength," Ineson said.

In 2004, global LNG consumption averaged 17 Bcfd. Houston-based Cheniere LNG President Keith Meyer estimates worldwide liquefaction capacity could reach 41 Bcfd by 2010. Of that, the Asia-Pacific region will take about 17 Bcfd, and Europe will consume between 6 and 8 Bcfd, leaving between 16 Bcfd and 19 Bcfd for the U.S. market by 2010.

In January, Cheniere received FERC clearance to begin construction of a 2.6 Bcfd LNG terminal in Corpus Christi, Texas. Cheniere also started building the Sabine Pass terminal last year in Cameron Parish, La., and the Freeport LNG terminal in Freeport, Texas, in March 2005.

As domestic imports of LNG grow, the United States will achieve an increasingly important position in the global gas market, Meyer said, suggesting the NYMEX Henry Hub gas price will gradually become a global benchmark price for LNG. Although LNG prices in foreign countries today are often linked to crude oil prices, "We don't see North American buyers ever really getting comfortable with an oil-based index." However, global LNG buyers are becoming "very comfortable with the liquidity and the oversight" of a NYMEX-based benchmark, Meyer said. Spot cargoes of LNG in the Asian market are already priced off the Henry Hub. Swing cargoes in the Atlantic Basin going to Europe are often priced off the Henry Hub already.

Lots of Political Hurdles

Recent political discussions have called for the United States to reduce its dependence on foreign energy sources. But "North America does not have a good domestic solution" Meyer said, given that traditional gas plays in both the U. S. and Canada are mature. Consequently, "LNG is very much needed for the health of the demand side of our industry."

Supply and demand issues aside, LNG's geopolitical issues will loom large, according to a new analysis from Daniel Yergin, chairman of Cambridge Energy Research Associates. "The United States must face the uncomfortable fact that its goal of 'energy independence'—a phrase that has become a mantra since it was first articulated by Richard Nixon four weeks after the 1973 embargo was put in place—is increasingly at odds with reality," Yergin wrote in the March/April issue of Foreign Affairs magazine.

The United States must recognize "the reality of integration" that currently exists in the oil market—and will soon exist in the LNG market. "Secession is not an option," Yergin added.

A global spot market for LNG will develop over the next 15 years, but what form it will take and who will assume the financial risks are still largely unknown, most experts suggest.

Audie Setters, vice president of international marketing and business development for Chevron Global Gas, said the LNG market in 2020 will involve "a lot more swapping and trading" than the current market. "A lot of LNG business is linked by long-term contracts from the wellhead to the marketplace," Setters said. "We're seeing a lot of those chains coming undone."

As a result of such fundamental changes in the worldwide LNG market, the future will see a "lot more risk for each link in the value chain," Setters predicted. "It's just getting harder to tie these together."

Currently, the largest LNG markets in the world are in East Asian countries where LNG prices are still based primarily on long-term contracts. By 2020, the U.S. LNG market is expected to become the world's largest, with about 25% of global demand.

But Setters warned that the U.S. energy industry could potentially over build LNG import capacity. "Fifteen years from now we could be in an over supply situation," he said.

Cheniere's Meyer said this is the "year of attrition" for many proposed U.S. LNG import terminals. Many of the dozens of announced projects will quietly fade from view.