U.S. buyers are outbid in the natural-gas crunch
Imports remain low as Asia and Europe compete for supply
By RUSSELL GOLD
Staff Reporter of THE WALL STREET JOURNAL
December 16, 2005
Even with natural-gas prices surging to new heights and heating bills soaring across the U.S., much of the nation's import capacity remains idle.
The U.S. has four onshore terminals for receiving and processing imported gas, and they are processing only about half the volume they can handle. The reason: U.S. buyers are being aggressively outbid by Europeans and Asians for the limited number of cargoes available.
The supply crunch means natural-gas prices will stay high -- and sensitive to weather changes -- for years, even as the U.S. builds more terminals to handle overseas gas.
"There will be continued competition for supply, certainly through the end of the decade," says Martin Houston, president of North American operations for BG Group PLC, the largest importer of liquefied natural gas into the U.S.
In the U.S., natural-gas prices are up fivefold since the beginning of the decade, and near records in both nominal and inflation-adjusted terms. On Tuesday, prices hit an inflation-adjusted record of $15.38 per million British thermal units. Thursday, they dropped quickly after models predicted warmer-than-average weather after Christmas, despite news that a surprisingly large volume of gas had been drawn out of underground storage owing to the recent U.S. cold snap. Natural gas closed down 6.1% at $13.781 per million BTUs on the New York Mercantile Exchange.
About 57% of the U.S.'s 110 million households use natural gas for heat, according to the Census Bureau. The U.S. Energy Department forecasts that the average U.S. household that heats primarily with natural gas will spend 38% more this year. Natural gas also is used for such purposes as generating electricity and producing plastics and fertilizer. Demand has grown amid a strengthening economy and interest in cleaner-burning fuel.
High prices are one reason big producers are looking to boost North American gas production. This week, ConocoPhillips said it would pay $35.6 billion to acquire Burlington Resources Inc.. Eighty percent of Burlington's assets are North American gas.
But imports also are key. While the majority of natural gas consumed in the U.S. comes from North American wells, many aging fields can't produce more.
The import conundrum dates to the beginning of this decade, when prices spiked -- at a time when production was flat -- and government and industry officials began pushing to increase natural-gas supply.
In 2001, the industry began reopening mothballed liquefied natural-gas terminals and proposed building dozens of new ones. The administration of President George W. Bush backed the effort to help bring down prices, and the government streamlined the regulatory process. Companies campaigned to persuade communities to allow them to build terminals, often in the face of vigorous local opposition.
That won some approvals, but new terminals require years to build. Shipping natural gas is a tricky process. The gas is shipped in very cold liquefied form, which dramatically boosts volume, but must be reheated and returned to a gaseous form at terminals when received.
With U.S. production leveled off, the energy industry expected to compensate with imports from the Middle East and Africa, where excess supplies of the fuel are never brought to market. Instead, a pressing global shortage has developed, in part because of overseas competition. As the price of liquefied natural gas fell, a building boom began. While supply increased and the number of cargoes available for purchase on the spot market grew, so too did the number of new import terminals in other countries.
Global production capacity for natural gas, in liquefied form, is about 20 billion cubic feet, or about 600 million cubic meters, a day, but there are enough terminals around the globe to eat up twice that volume, according to the Federal Energy Regulatory Commission.
A global shortage has developed in recent months, amid supply glitches, cold weather in the U.K. and a drought in Spain, which has been turning to liquefied natural gas to make up for a shortfall in hydroelectric power.
In an extreme example of the situation, a tanker carrying liquefied natural gas last month arrived from Nigeria and idled in the Gulf of Mexico for a week -- during which prices in Europe rose -- before sailing on to Spain to unload its cargo. Recently, the Spanish have been willing to pay $2 to $3 per million BTUs above Gulf Coast spot prices, according to PIRA Energy Group, a New York consultant. South Koreans, meanwhile, are paying a premium of about $2 and the British a premium of $2 to $6.
The gap underscores the differences between the oil and gas markets. Oil can be easily loaded onto a tanker and sold into a well-developed global market that has been fine-tuned over decades. Natural gas, by contrast, is difficult to transport except by pipeline, and liquefied-natural-gas shipments are still a relatively small portion of the overall market. That means the price can vary widely by region, depending on factors such as weather and the availability of alternative fuels.
The international spot-market trade in liquefied natural gas is relatively new. Until recently, consumers got gas through regional pipeline hubs, which created geographically isolated markets. Gas-short nations such as Japan and South Korea bought natural gas under iron-clad long-term contracts.
Geography puts the U.S. at a disadvantage. Most supplies of liquefied natural gas for Europe and the U.S. come from West Africa, the Mediterranean and the Middle East. Europe is closer, which makes delivery less expensive. The only supplier close to the U.S. is in Trinidad.
Moreover, the price European buyers are willing to pay is so high that a tanker from Trinidad arrived in the U.K. on Tuesday, according to Waterbourne LNG, a weekly publication of Houston energy consulting firm Commercial Services Co. The voyage marked one of the first times liquefied natural gas from the Caribbean had crossed the Atlantic in pursuit of higher prices.
The U.S. also faces the problem of being the newest entrant in the market and still a small purchaser. |
