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Too much of a good thing Too much Alaska LNG could overload California market, driving down prices Larry Persily Petroleum News Juneau Correspondent
Alaskans may be looking to sell liquefied natural gas into the California market, but it�s not as easy as building a $2 billion gas treatment plant on the North Slope, an 800-mile pipeline to a liquefaction terminal at Valdez, assembling a billion-dollar fleet of LNG tankers and convincing a community to accept a regasification terminal on its waterfront.
There are the questions of how much gas the market needs, who will supply the gas, and what might happen to the price if too much new gas comes to California.
At least eight LNG receiving terminals are proposed for the California market, ranging from 680 million cubic feet per day to 1.5 billion cubic feet in capacity, and with half of them proposed for Mexico�s Baja coast to avoid site debates in California. The long list of wannabe projects is looking to serve a limited market, with little excess pipeline capacity to move gas elsewhere.
Of course, much of the gas currently piped into California could go to other states in the Northwest or Southwest if LNG were off-loaded on the coast, making room for some LNG.
Meanwhile, producers, buyers and potential investors are asking how much is too much for the market.
�You can easily swamp a market if you put too much gas into it,� said Jim Jensen, a natural gas consultant with 30 years experience in U.S. markets. �There�s an awful lot of gaming going on in the press,� he said of the seemingly endless reports of proposed LNG projects to serve California.
Commenting on the multiple LNG terminals proposed for the West Coast and the Alaska Natural Gas Development Authority�s push to sell 1.5 bcf to 2 bcf per day into California, Jensen said, �A group that wants to put in 2 bcf a day � that�s an idea whose time has come and gone.�
He compared it to Yukon Pacific Corp.�s unsuccessful 20-year effort to ship 2 bcf per day of Alaska LNG to market, though much of the time the company has promoted sales to the Far East instead of California. The problems are the same, Jensen said. �The problem with Yukon Pacific was always � the economies of scale and what the market would absorb.�
Moving 4.5 bcf per day of Alaska gas in a pipeline to a much larger mid-America market has less risk and better economies of scale than shipping 2 bcf per day to a much smaller California market, he said.
Jensen, whose office is in Massachusetts, is familiar with Alaska�s effort to market its gas. He consulted on the Alaska Natural Gas Transportation System, the highway gas pipeline route to mid-America President Jimmy Carter selected in 1977.
No shortage of problems Deborah Resley, an LNG consultant in Houston, has 20 years in the natural gas business. She, too, is a bit cautious about the California market. �There are just a myriad of problems,� she said. �The market-specific issues are fairly daunting as well. Once you�ve regasified the gas, where are you going to ship it?�
A successful LNG project most likely will require a company with downstream markets for the gas, such as Sempra Energy or ChevronTexaco, Resley said. Pipeline capacity also is a concern, as options to move excess gas to other markets are limited. �Right now, California is on the rump, on the end of all the pipelines.�
It�s different in the Gulf of Mexico, where hopeful companies have proposed a dozen new LNG terminals. There, underutilized pipeline capacity would make it easier to move LNG away from the dock and to markets throughout the region and into the Midwest, she said.
History provides a lesson for the California market, Jensen said. When the Pacific Gas Transmission Co. expanded its pipeline capacity from Alberta by almost 500 million cubic feet per day to boost California�s supply by 10 percent in 1994, gas prices in California took a deep dive.
Expensive history lesson Whereas gas was selling at close to the Henry Hub price before the additional supply, prices dropped to as low as $1.50 below Henry Hub 18 months later. It took another year before prices recovered to within 25 cents of Henry Hub, Jensen said.
California prices are quite volatile, he said, adding he wouldn�t be surprised if an oversupply in the market forced prices down 10 percent or more.
Jensen was quick to point to another historical fact. The United States set a record for natural gas consumption at 22 trillion cubic feet in 1972, when the average wellhead value was 22 cents. Then the federal government deregulated gas, prices went up and demand dropped. The country didn�t reach 22 tcf again until 28 years later.
Supporters of pushing Alaska LNG into the California market base much of their enthusiasm on strong growth projections for demand. Here, again, Jensen sounds a more cautious note. �I don�t think demand has really made its case.� Though he believes $4 an mcf gas is probably here to stay, �demand destruction� at that price will eat into growth projections. There are some industrial users of gas that just cannot afford to pay the price and remain competitive.
�There may be a tendency to overestimate the demand side,� he said. FERC ruling a big change Jensen and Resley agree that a recent Federal Energy Regulatory Commission decision and changes in contract terms for LNG will greatly affect the future of new projects. The FERC decision allows suppliers to maintain exclusive use of their own receiving terminals, rather than opening them up for other suppliers.
The ruling is �extremely beneficial to some players,� Resley said.
Producers were reluctant to invest in new LNG projects unless they could control the throughput into the market, Jensen said.
�Thus, the momentum for U.S. terminal investment seems to be shifting in favor of players with upstream assets, where the largest investments and risks are located,� Jensen said in a presentation to an energy forum in Maryland in July.
�It�s whole new world,� Resley said. �Costs have come down and prices are up.�
Still, a nagging issue is pipeline capacity to move the gas to where it�s needed at the best price. �The most important issue,� she said, �is that you can bring it (LNG) into a pipeline-dominated market and make money.�
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