Frank,
Though you might enjoy this:
Wednesday, April 25, 2001
By Kathleen McFall
kmcfall@ftenergy.com
Historically, liquefied natural gas (LNG) has supplied less than 1% of overall U.S. gas demand, due to high costs of transportation and liquefaction. Now, with the fundamental paradigm shift from $2 to $5 per thousand cubic feet (Mcf) for natural gas, producers are cautiously looking to the LNG industry to link remote supplies with growing demand.
"Above $4, there are gas reserves around the world that become very attractive to U.S. markets," said Robert Nimocks, president of Houston-based LNG consulting specialists, Zeus Development Corp.
LNG is natural gas that has been transformed to a liquid by super-cooling it to minus 260 degrees Fahrenheit, reducing its volume by a factor of 600. LNG is then shipped on board special carriers, and the process is reversed at a receiving facility with the re-gasified product delivered via pipeline.
"LNG has historically been viewed as an alternative to traditionally produced natural gas. I believe it's now in a transition period, gradually being seen as a commodity in its own right," Nimocks said.
According to Department of Energy (DOE) forecasts, LNG will not provide a major contribution to U.S. supply by 2020, but it is projected to make up a growing percentage of imports. Imports peaked at 253 billion cubic feet (Bcf) in 1979 and dropped to 18 Bcf in 1995. In 1999, imports were 163 Bcf.
Others, however, are more bullish than the DOE on its potential contribution to U.S. supply.
"We believe LNG will be among the fastest growing segments of the energy industry with a 10% to 15% annual growth rate over the next decade," said Ralph Eads, president of El Paso Merchant Energy Group, in a recent statement.
Connecting supply with demand
LNG enjoyed a brief heyday in the 1980s, but domestic discoveries and the subsequent decline in gas prices resulted in a short-lived glory.
"In the Jimmy Carter era, there was the general belief that the domestic gas supply would run out in ten years. LNG terminals were built on the East Coast to move gas from Northern Africa. After numerous gas discoveries in the U.S., we entered into the gas bubble period, and LNG simply could not compete. Two of the existing four terminals went idle," said Nimocks.
Now, traditional sources of very cheap gas from places like Texas and the Gulf of Mexico are having trouble keeping pace with rising demand.
"Domestic gas production is moving into deeper offshore areas and getting costlier to produce. Major producing regions are shifting to western Canada and as far north as Alaska and offshore eastern Canada," said Nimocks. Consequently, gas supplies are now farther away from big demand centers.
Casting more allure in the direction of LNG is that capital costs associated with processing facilities are coming down.
"New technology for LNG processing facilities and lower shipping costs have reduced the expense of delivering the fuel to strategic locations, enabling us to create new markets for natural gas consumption," said William A. Smith, executive vice president of El Paso Corp.
Reductions in trade barriers, innovations in procurement strategies and fabrication processes have also contributed to the decrease in LNG costs, said Nimocks.
Despite this convergence of positive trends, significant barriers remain for the LNG industry, especially related to regasification terminal siting and project financing.
"The biggest hurdle is locating new receiving terminals," said Nimocks, due to the regulatory process and objections from people living near a proposed facility. "This can become a public relations battle."
Also, lending institutions have historically required project developers to secure long-term contracts for gas sales. "The tradition has been to contract the gas for as much as 25 years. This has been one of the biggest impediments to growth," said Nimocks.
Combine this with the volatility of natural gas prices and the uncertainty of future demand patterns, and speculative building is discouraged because the LNG seller ends up taking all the price risk.
However, more recently, the development of a spot market has made the LNG market more flexible and more able to respond to the short-term needs of both buyers and sellers. According to the DOE, in 1999, U.S. buyers purchased 27 cargos of LNG under spot sales, 19 more than in 1998.
Suddenly assets: eastern terminals reopening
There is an aggregate existing sustainable capacity of 840 Bcf per year at four U.S. LNG import facilities, all of which are located in the East. Cabot LNG operates one of four LNG terminals at Everett, Mass., near Boston. The company is in the process of more than doubling its vaporization capacity from 435 million cubic feet (MMcf) per day to 1 Bcf per day by the end of the year.
Michigan-based CMS Energy recently received FERC approval to expand its Lake Charles, La. terminal from its current send-out capacity of 700 MMcf per day to a peak capacity of 1 Bcf per day.
Two of the four U.S. facilities-at Cove Point, Md. and Elba Island, Ga.-have been mothballed for many years, but plans to reopen both have been announced.
New West Coast markets
For the LNG industry to take off, however, it will need more than these four facilities. Several recent announcements by big players in the energy markets indicate a growing belief that the regulatory and financing barriers may no longer be insurmountable, especially if Mexico proves to be receptive to LNG terminal construction.
El Paso said it plans to bring LNG supplies to North American markets by developing new LNG terminals in the United States, Mexico and the Bahamas. The company recently signed a letter of intent with Phillips Petroleum Co. for the delivery of 4.8 million metric tons per year of LNG from Australia to Mexico's west coast. This agreement paves the way for a LNG plant in Darwin, Australia, and an LNG receiving terminal in Baja California, Mexico. Callout: Shipping LNG to the West Coast has tremendous potential to ease the region's energy shortages.
In late March, Chevron Corp. said it was studying plans to ship LNG to the West Coast from its gas holdings in Australia. "We think this project has tremendous possibilities both in terms of helping to ease the region's energy shortages and using a clean fuel to do it," said Peter Robertson, president of Chevron Overseas Petroleum Inc. As part of the project review, the Chevron team will evaluate several alternative locations-including offshore-for the receiving terminal facilities.
BP Amoco Plc also has tentative plans to build up to three new LNG terminals, citing Mexico as among sites being considered to meet demand for natural gas on the West Coast with its own reserves.
If gas prices remain high, as most analysts expect them to, signs indicate that LNG may be poised for a growth spurt. Arthur Dixon, president of Australia LNG neatly summarized the situation in a recent Bloomberg statement. "The U.S. West Coast market is an exciting one, and we are very actively looking at that. We've got gas. They want it. Why not?"
Jim |
