Bidding War Chills U.S. Plan To Import Gas
By RUSSELL GOLD
Staff Reporter of THE WALL STREET JOURNAL
December 19, 2005; Page C1
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 nation has four onshore terminals for receiving and processing imported gas, and they are importing 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 imports won't cool the U.S. market and natural-gas prices could stay high -- and sensitive to weather changes -- for years to come, 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. At one point early last week, prices hit an inflation-adjusted record of $15.38 per million British thermal units.
They dropped quickly Thursday 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 due to the recent U.S. cold snap. Friday, natural gas closed down 1.1% at $13.633 per million BTUs.
Fueling Deals
About 57% of the nation's 110 million households use natural gas for heat, according to the Census Bureau. The Energy Department forecasts that the average U.S. household that heats primarily with natural gas will spend 38% more this year, compared with a projected 21% increase for users of home heating oil.
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. Last week, ConocoPhillips said it would pay $35.6 billion to acquire Burlington Resources Inc. in the largest energy acquisition in years. 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 fields are aging and the industry has found it difficult to boost production. With domestic production leveled off, the energy industry expected to compensate with imports from the Middle East and Africa, where excess supplies of the fuel are sometimes flared off and never brought to market.
Still, shipping natural gas is a tricky process. The gas is shipped in cold liquefied form, which dramatically boosts volume and must be reheated and returned to a gaseous form at terminals when received.
The current 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 the process of reopening mothballed liquefied natural-gas terminals and proposed building dozens of new ones. The Bush administration backed the effort, and the federal government streamlined the regulatory process. Companies campaigned to persuade communities to allow them to build terminals, often in the face of local opposition. After facing federal reviews, the lengthy process of building new terminals has begun.
The theory was that if the U.S., the world's largest gas consumer, opened for imports, there would be tankers lining up to discharge their cargo. There was "a self-indulgent, myopic belief that if the U.S. builds a terminal, everyone wants to supply us. And that is what has been wrong," says James Jensen, an industry consultant in Weston, Mass.
Instead, a pressing global shortage has developed, in part because of overseas competition. As the price of liquefying natural gas fell, a global 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 a day, but there are now enough terminals around the globe to eat up twice that volume, according to the Federal Energy Regulatory Commission.
Premium Prices
As a result, a global shortage has developed in recent months, amid supply glitches, cold weather in the United Kingdom 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 soared in Europe -- before sailing 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 yawning 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 LNG 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 natural gas through a collection of 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.
New to the Game
Moreover, European buyers currently are willing to pay such a high price that a tanker from Trinidad arrived in the U.K. 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. "The larger buyers, the ones with a long history of being in the business and making consistent purchases, are now in the position where they need more," says Rick Grant, president and chief executive at Suez LNG, a subsidiary of French utility company Suez SA that operates an LNG terminal near Boston. "And because of the relationships, they can compete very aggressively in the market for the cargoes that become available."
U.S. officials believe new terminals will attract significantly more imports starting in 2008, when gas from new projects is expected to hit the market. The increased supplies are likely to allow for long-term supply contracts, reducing dependence on the volatile spot market.
"We are 25% of the natural-gas market world-wide," says J. Mark Robinson, director of FERC's Office of Energy Projects. "We are the big market. On an individual cargo, you might get outbid by Spain, but if you want a long-term monetization of your reserves, I think the U.S. is the place to do that."
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