Boomtime for LNG
pe.pennwellnet.com
By Brian K. Schimmoller,
Managing Editor
As natural gas prices drift (and spike) higher, more and more attention is being given to LNG (liquefied natural gas) and the prospects for significant import growth to the U.S. As a result, a significant number of re-gasifying terminals will likely get built over the next 3-5 years. Developers, owners and investors, however, will need to guard against the replication of conditions which could lead to the "house-of-cards" market saturation situation that now exists for gas-fired power plants.
LNG currently satisfies about 2% of U.S. natural gas demand, primarily through four import terminals on the East Coast and Gulf of Mexico. Rising demand for natural gas, coupled with the rising price of natural gas, has convinced the owners of the existing LNG import terminals to re-start and/or expand production, and has prompted developers to propose 25-30 new terminals along the East Coast, Gulf of Mexico, California and Baja California (Mexico).
Absent Congressional action to open up more land — on and offshore — to natural gas drilling and exploration, the U.S. will be hard-pressed to satisfy demand without a significant increase in LNG imports. Based on current projections, North American natural gas demand is expected to exceed projected supply by about 10 Bcf/day by 2015. LNG is poised to fill the gap, but the new regasification terminals under development — representing 20-25 Bcf/day of capacity — is potential supply overkill.
On the surface, the warning signs associated with the painful merchant power overbuild appear to be present in the nascent LNG boom: Many, many announcements of capacity additions assuming large demand growth. Developers focused more on site identification and project execution than on long-term economic analysis. Expectations that gas markets will remain strong and support quick capital investment recovery.
Despite such signs, the likelihood of a glut of LNG import terminals — and the likelihood of a resulting financial crunch — is much lower. First, coming so close on the heels of the financial troubles in the merchant power sector, one would hope developers have acquired a much more sensitive understanding of the inherent financial risks. Second, the magnitude of LNG projects — in terms of required capital, construction schedule, and the supply chain — mitigate against over-exuberance. While competition has driven costs down considerably, a liquefying plant costs about $1 billion, a tanker costs $150-170 million, and an import terminal runs $300-$500 million. Integrating these pieces along the supply chain is no simple matter, and after adding in the time required to secure the necessary permits, an LNG project typically takes 6-8 years to develop.
Third, most of the existing terminals could increase capacity significantly, potentially dampening the attractiveness of new terminals. Jeff Beale, President of the LNG consulting and engineering firm CH·IV International, believes at least 4 Bcf/day of capacity could be added at the existing and permitted LNG facilities without siting a new facility. While such expansions would require separate investments in gas storage, pipeline takeaway capacity, and, in some cases, marine facilities, the terminal expansions themselves should be cheaper than building greenfield facilities.
Fourth, LNG terminals are more intimately tied to long-term contracts than their power counterparts. "You don't see speculative building in the LNG industry," says Beale. "Each of the new LNG facilities will need an anchor tenant — representing at least 50% of the sendout capacity — to get a financial deal closed." Of the 25-30 proposed LNG terminals, Beale admits there might be a few moving forward on speculation, but these won't move to construction without the anchor deal.
Finally, the growing presence in the LNG supply chain of the deep-pocketed Big Oil players — BP, Shell, ExxonMobil, ChevronTexaco — does not eliminate risk, but it certainly reduces the possibility of financial disaster. Big Oil, which basically shunned LNG during its formative years 20-plus years ago, now views LNG with profit-thirsty eyes, and should apply the management and fiscal discipline necessary to prevent an overbuild scenario.
To the power generation sector, the manner in which the LNG industry evolves over the next 5-10 years is actually of little importance, except as to how it impacts natural gas supply and natural gas prices. Some believe that when LNG grows to the point where it satisfies 10% or more of U.S. gas demand, it could function as a topside price cap on natural gas prices. Others content that LNG could ultimately occupy a role similar to baseload power generation, providing reliable supply and setting a price floor. Unfortunately, there is no empirical evidence to back up either claim.
"It is important to keep in mind that this is and always will be a global market," says Mike Schick, President of Energy Analytics LLC, a natural gas consulting group in Houston. "Even with domestic gas prices as high as they are today, we will always have to compete with other major markets such as Japan and China. The dynamics of the gas market, swinging between excess supply and excess demand, will continue to result in volatile pricing. LNG will be an important player in this market, but it is unlikely to function as either a price floor or ceiling."
Amid the LNG fervor, some have come to view LNG as some sort of "supply savior," able to fill any developing supply shortfall at competitive prices. LNG is not a savior. It will undoubtedly become a larger and more essential part of the North American energy supply system. It will likely apply some pressure on natural gas prices. But it won't guarantee prices below a certain level, and the LNG terminal build-out will have to be managed responsibly to guard against over-extension and over-reliance.
In the long, dark shadow of the merchant power overbuild, LNG appears poised to step into the spotlight. Let's make sure the spotlight doesn't shine on another house of cards.
Power Engineering February, 2004
Author(s) : Brian Schimmoller |
