"How Trinidad Became a Big Supplier Of Liquefied Natural Gas to the U.S."
March 13, 2001
By Alexei Barrionuevo
Staff Reporter of The Wall Street Journal
POINT FORTIN, Trinidad -- When energy executives gathered on this small island in May 1994, the notion of building a profitable liquefied-natural-gas plant here drew scorn. Martin Houston, then head of British Gas PLC's Trinidad operations, recalls a competitor commenting, "If you build an LNG facility in Trinidad, I will eat my shoes."
Two years later, at a ground-breaking ceremony for just such a facility, Mr. Houston suggested to the crowd that the skeptic be sent "a little bit of hot pepper sauce for his shoes."
Today, the Caribbean nation of 1.3 million people is an increasingly important energy supplier to the U.S. East Coast. The Trinidad plant provides 40% of U.S. imports of liquefied-natural gas, or LNG -- far more than Algeria, the next biggest supplier.
It's a good time to be selling LNG. Natural-gas supplies have been tight this winter, with skyrocketing prices contributing to the energy crisis in California and to the broader U.S. economic downturn. Demand for clean-burning natural gas continues to rise. More than 90% of new U.S. power-generating plants under construction are gas-fired. This week, Royal Dutch/Shell Group displayed its eagerness to exploit the U.S. market by launching a hostile $1.8 billion tender offer for little-known Barrett Resources Corp., a Denver gas producer.
Liquefying natural gas for storage on ships or in tanks on land ordinarily makes LNG more expensive than gas transported by pipeline in vapor form. But as older U.S. natural-gas fields run low, suppliers are scrounging for anything they can get. LNG shipped 2,200 miles from Port Fortin to energy-strapped New England now competes favorably with gas sent by pipeline from such places as Texas.
Trinidad, an island best known for Carnival celebrations, satiric Calypso music and spicy East-Indian food, operates the only liquefied-natural-gas plant in the western half of the Atlantic. It provides about 15% of New England's overall gas needs and as much as 30% during peak-usage periods, such as when temperatures fall sharply.
Mr. Houston and others give much of the credit for Trinidad's unlikely ascension in the LNG field to Gordon Shearer, a determined geophysicist born and raised in Scotland. In the late 1980s, Mr. Shearer was asked by his employer, Boston-based Cabot Corp., to revive the company's struggling LNG business. His audacious rescue plan eventually focused on building a plant in Trinidad few believed would ever succeed.
Only seven miles off the coast of Venezuela, Trinidad is on the eastern edge of a region rich in oil and natural gas that extends to Colombia. For more than half a century, oil had been the island's lifeblood. Natural gas, which sometimes surfaces during oil drilling, used to be seen as a nuisance in Trinidad and was generally burned off into oblivion. But as oil supplies here have begun drying up, producers have discovered large offshore reservoirs of natural gas in the soft sedimentary rock beneath the Atlantic Ocean and Caribbean Sea.
Once seen as an exotic, volatile form of fuel that many wrote off as too expensive and dangerous for the U.S. market, LNG is natural gas cooled to minus 260 degrees Fahrenheit -- enough to change it to a liquid from a vapor. The cooling process shrinks the gas to one-six hundredth of its original volume, allowing it to be stored in ships and land tanks. When the fuel is needed, it is converted back into a gas.
The cooling and conversion processes cost about $1.50 per million British thermal units, or BTUs, of natural gas. (The typical U.S. home using natural gas this winter consumed one billion BTUs, costing $933, or 73% more than last year.) When the wholesale price of gas was about $2 per million BTUs, as it was for most of the 1990s, LNG was simply too expensive an option for the U.S.
As American gas prices soared to near $10 per million BTUs last year, and then settled back into a range of $5 to $6, it became possible to make a profit on LNG in the U.S. For many years, LNG has been a key energy source in Japan and other parts of Asia that lack domestic fuel sources and where gas prices are comparatively high.
LNG so far makes up less than 2% of the U.S. natural-gas supply. But the Department of Energy predicts LNG imports will increase more than fivefold by 2020, to 390 billion cubic feet a year. In recent weeks, several U.S. natural-gas companies have said they are bringing back mothballed LNG terminals and looking to build new ones. Enron Corp. and a group led by Shell are negotiating with Venezuela to build two separate liquefaction plants there. El Paso Corp. plans to construct a handful of terminals to serve the U.S. and Mexican markets, including at least one aimed at fuel-starved California.
Trinidad has a huge head start, thanks largely to Cabot's Mr. Shearer. He was 32 years old in 1987 when Cabot handed him the job of turning around its LNG business. At the time, that business consisted of a receiving terminal in Massachusetts that had been shut down because of a contract dispute with Algerian suppliers.
Similar price disputes with those suppliers had shut the three other U.S. receiving terminals, and fears lingered about the safety of LNG's high volatility. An LNG-fueled fire in Cleveland in 1944 killed 128 people and still haunted the industry. Cabot's Boston-area terminal had been the subject of a "60 Minutes" broadcast in 1978 warning of LNG's explosive capability.
Still, Mr. Shearer, who holds a Harvard MBA, and his boss, Sam Bodman, Cabot's chairman, viewed their terminal as a hard-to-replicate facility that one day could serve as a hub for the New England natural-gas industry. Safety improvements had been made over the years in how LNG was stored and handled. So, Mr. Shearer settled the Algerian price dispute, reactivated Cabot's terminal and began looking for new LNG sources.
A lanky, bearded man who sails as a hobby, Mr. Shearer considered Nigeria and Venezuela as sources but ultimately set his sights on Trinidad. Critical to this decision was a seaside lunch in June 1990 in Laguna Nigel, Calif., with Cliff Davis, an industry veteran who had tried for nearly a decade to pull together an LNG project on the island.
Mr. Davis, then chairman of Midcon Corp., pointed out that Trinidad's potential gas supply was large and proximity to the U.S. would lower transportation costs. What's more, gas fetches a relatively high price in New England because it is expensive to move it by pipeline the long distance from the Southwest and other gas-rich regions. For unrelated reasons, Mr. Davis's Midcon had abandoned any Trinidad ambitions, and he turned over valuable files and contact information to a grateful Mr. Shearer.
"Here is little rinky-dink us [Cabot], just barely out of the ditch, and it's like, 'Wow!' " Mr. Shearer says, recalling his enthusiasm.
With an introduction from Midcon, he presented Trinidad officials with a plan designed to assuage fears on the island of a giant new plant. He proposed a small, relatively inexpensive facility that would serve Boston's LNG needs and could be built quickly. The $1 billion project would be half the size of industry standards at the time.
'Totally Harebrained' Project?
Officials in Trinidad liked the proposal, but Cabot's larger competitors mocked it. "You mentioned LNG to a banker in the U.S., and they thought you must be crazy," recalls former Amoco Corp. executive Gerald J. Peereboom, now president of the consortium that owns the Trinidad LNG project. Cabot didn't have any experience building such a plant, and gas prices were relatively low at the time. Most people in the industry found the Cabot plan "totally harebrained," Mr. Shearer recalls with evident pleasure.
But he found a key ally in Kenneth Julien, former chairman of Trinidad's national gas company, who had been working to develop the island's gas resources since the mid-1970s. The tall, burly Dr. Julien was the chief architect of the Point Lisas Industrial Estate, a coastal collection of some 20 natural-gas-fueled plants that help make Trinidad the world's largest exporter of methanol and ammonia, both of which are used in the chemicals industry.
Dr. Julien, now 68, says he felt a kinship with Mr. Shearer. "We were both small guys who had to deal with the massive Amoco and British Gas," Dr. Julien explains. Mr. Shearer, he adds, "had an obsession that the LNG business was going to happen [in Trinidad], and he wanted to be a part of it."
The pair won over Patrick Manning, then Trinidad's prime minister. But it proved much tougher to persuade Amoco and British Gas, the big producers on the island, which were needed as investors in and suppliers to the project. Amoco, which three years ago was acquired by British Petroleum PLC, was skeptical that the U.S. would ever provide strong demand for LNG.
"Amoco had to be brought screaming to the LNG table," Dr. Julien recalls. "Amoco senior management was not convinced that this gas business could really work in Trinidad," confirms Robert Riley, who now heads operations on the island for BP Amoco .
As negotiations progressed, Mr. Shearer's aggressive demands and sometimes-grating personality annoyed some executives with the big producers, according to several people at the meetings. He tended to interrupt others and was not shy about displaying his impressive technical expertise.
"He personally took on BG [British Gas] and Amoco, and he ran rings around them," says Frank Look Kin, president of Trinidad's national gas company.
"The big oil companies are used to dealing with smaller players by keeping them in their place," Mr. Shearer says. "We had to be more proportionately noisy to make sure our interests weren't swamped."
Negotiations dragged on from 1993 through 1996 and often grew testy. "There were many times when I thought the shutters were going to come down," says Mr. Houston of British Gas.
The Diplomat
Dr. Julien played diplomat, beating his hands on the table to punctuate points. "When he spoke," says Mr. Houston, "people listened."
But Amoco continued to waver. The company's chairman and chief executive, Larry Fuller, worried that even if LNG demand in the U.S. were strong enough, Trinidad wouldn't have enough gas to satisfy the demand.
Cabot's Mr. Bodman tried to capitalize on a strong personal connection: He and Mr. Fuller had roomed together as chemical-engineering students at Cornell University in the early 1960s and had married members of the same sorority. Although the men remained fishing and hunting buddies, that wasn't enough to sway Mr. Fuller.
In the fall of 1993, Trinidad's Dr. Julien accompanied Prime Minister Manning to Amoco's Chicago headquarters for a final sales pitch. Mr. Fuller was still worried. "This was a big gamble for us," he recalls. But Mr. Fuller was impressed by what he calls Mr. Manning's "forceful" arguments. "I still had reservations after the meeting," Mr. Fuller says, "but everybody left committed to go forward with the arrangement."
Beyond agreeing to supply the plant with gas, Amoco acquired a 34% stake in the facility for $340 million. The other original major investors were Cabot, British Gas, and the Trinidad government.
In June 1996, Trinidad broke ground at Point Fortin. To keep the project within its $1 billion budget, engineers eliminated oversized jetties, fancy administration buildings and extra loading arms that pump gas into ships. The first LNG shipment left for Boston in April 1999.
The facility has been such a success that the Trinidad government, overcoming its past hesitations about the plant's size, has approved a tripling of its capacity by the end of 2002. If U.S. gas prices drop significantly, an unusual arrangement among the plant's owners would allow them to share the pain.
The island projects that its share of revenue from the plant and from taxes on gas exploration will average $300 million a year during the next two decades. By 2003, LNG-related income to the government is predicted to cover at least 10% of the country's annual budget.
More Cars and Shopping Malls
Money from Trinidad's LNG project and burgeoning gas economy is gradually becoming visible on the island. Shiny new European sports cars dot the streets of the capital, Port of Spain. The government says it is licensing some 20,000 cars a year, double the rate of just five years ago -- a reflection of increased disposable income and tax incentives favoring new imported cars. Glitzy shopping malls are sprouting in some areas, and the overall economy is growing by about 7% a year.
BP Amoco now sees LNG as an "extremely attractive way" to turn its huge gas reserves in Trinidad into profits, says the company's Mr. Riley. The company's reserves here have tripled since 1992, to 21 trillion cubic feet of gas -- more than it has in all of North America. With recent higher U.S. gas prices, LNG from Trinidad today easily produces profits.
In January, on a remote harbor in Port Fortin, two hours from Trinidad's capital, two loading arms were pouring super-cooled liquid gas into the hull of a 950-foot ship, The Matthew. Within hours, the vessel, painted red, white and blue, was headed for Boston with enough gas to satisfy 27,000 residential customers for a year. The plant is also shipping gas to Puerto Rico and Spain.
But Trinidad will have to hustle to maintain its strong position in selling to North America and Europe. Nigeria, with far greater reserves, is expanding its liquefaction capacity. Venezuela and Norway are in discussions about building liquefaction plants that could compete in the U.S.
Mr. Shearer and his employer, Cabot, however, have contentedly dropped out of the LNG chase. Cabot last year sold its entire LNG business, including a remaining stake in the Trinidad project, to Belgium's Tractebel S.A., for $688 million -- a deal viewed in the industry as a coup for Cabot. Mr. Shearer, now 46, helped negotiate the sale and received a personal reward worth about $1 million in cash and stock.
In January, Mr. Shearer took a new job with a ship-brokerage and consulting firm in New York. He says he plans to decorate his new office much like his old one at Cabot, with models of sailing ships and a prominent place for a reminder of his Trinidad experience: a copy of the children's book "The Little Engine That Could."
Write to Alexei Barrionuevo at alexei.barrionuevo@wsj.com
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